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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
Selective Dividend Reinvestment Vs. DRIP
Posted by: Jason Fieber (IP Logged)
Date: March 27, 2014 08:23AM
Recently, I was contacted by a reader named Talgat. He emailed me all the way from Kazakhstan. It’s truly wonderful to have readers from halfway across the world!
Talgat had a question about dividend reinvestment. I wrote about this a while ago, but I thought I’d refresh this subject.
His question is verbatim as follows:
Great question, Talgat.
Selective Dividend Reinvestment
What I do is I selectively reinvest my dividends. That means I collect my dividends in cash and I reinvest them selectively into equities that I choose. I certainly don’t withdraw them out of my brokerage account for expenses, as that would slow the process to financial independence. Any dollar I’m not investing is one less snowflake I’m adding to my compounding snowball. Furthermore, if I need a little extra cash all of the sudden then I would simply deposit less cash into my brokerage account and use it where it’s needed.
It’s important to remember that cash dividends are just another income source for you. They’re seen as an income source by the IRS, and I simply view them as one tool in my arsenal with which to purchase equities. Obviously, one of the main differences between my day job income and my dividend income is that I have to work for the former, while the latter is completely passive. Dividends require no work on my part, which is why I’m trying to build this source of income as soon as possible. The day my dividend income exceeds expenses means I’m financially independent and can do whatever I want with my time.
How I Do It
So my strategy basically boils down to thus: I try to save as much money as I can from all of my active income sources (day job, blog income) by living as frugally as reasonably possible. I then pool these savings with dividend income and use the combined sources of capital for my regular equity purchases.
I gross north of $50k/year at my day job, where I work as a service advisor at a luxury car dealership. I also receive some income for writing online, with this blog being my main creative outlet. I try to save as much of the income from these two sources of capital as possible, and then deposit those savings into my brokerage account once per month. This gets combined with whatever dividends have already accumulated since the last equity purchase.
Meanwhile, my dividends automatically accumulate as cash throughout the month. I don’t ever withdraw these dividends, but instead use them to supercharge my saved capital and invest all possible firepower. In the end, I think of reinvestment as just a fancy word. I’m simply investing capital, and I’m capital agnostic. Capital that comes from my day job, online income, or dividend income is all the same to me while I’m accumulating assets. However, for purposes of keeping things simple I think selective reinvestment best sums up my strategy.
Benefits Of Selective Dividend Reinvestment
I selectively reinvest my dividends for a number of reasons.
Dividend Reinvestment Program (DRIP)
While I selectively reinvest my dividends as I see fit, this isn’t for everyone. For many people, a DRIP makes a lot of sense. DRIPing means you buy an initial lot of shares with a company and set it up to automatically reinvest your dividends back into the company instead of receiving cash. Basically, you’re receiving shares instead of cash at this point. This can slowly build wealth for you over a long period of time without you having to worry about the stock market at all. Your investment is set completely on autopilot.
Buy Stock Direct
A very easy and popular way to do this is with Computershare. This company offers direct stock purchase from a number of companies. Check out the list. There are many companies where you can invest with very little money. ConocoPhillips (COP) stock, for example, can be purchased direct through Computershare for as little as $25.00 as on ongoing investment. However, this method is not fee-free. You can view the plan details with COP and see there are fees like $0.12 per share as a processing fee.
Benefits of a DRIP
While I have never personally wanted to set up a DRIP for any of my investments, there are some advantages.
If I didn’t invest so regularly I might investigate a DRIP, or even the FRIP for that matter. However, as long as I’m able to save thousands of dollars per month and invest on a monthly basis I’ll continue to add my dividends to my savings to maximize my capital firepower. While Warren Buffett (Trades, Portfolio) hunts with an elephant gun I hunt with a pellet gun. And my selectively reinvested dividends add a couple more pellets to my ammo.
Full Disclosure: Long EMR, GE, COP, PEP, KO, PM
How about you? Do you selectively reinvest dividends, or reinvest in a different manner?
Thanks for reading.
Stocks Discussed: EMR, GE, COP, PEP, KO, PM,