The following thoughtful question is from Kevin:
To DRIP or not to DRIP: that is the question I’ve been pondering for some time and I thought I’d ask your opinion. Basically, what are your views on DRIPs?
I see it in two ways:
1) I’ve purchased a great dividend (or income) producing stock/trust. With a DRIP I can continue to increase my holdings of that great company with no additional commissions or brokerage fees. Net effect: larger holding of a good company with a dollar-cost averaged purchase price and decreased average commissions/fees.
2) I’ve purchased a great dividend (or income) producing stock/trust at a discount. After some time the share price goes up and the stock sells at a premium. Without a DRIP I’ll get the dividends in cash and perhaps be able to purchase shares in a different company that is selling at a discount. Net effect: a diversified and value-cost averaged portfolio.
Thank you for a great question. The first option might be a reasonable choice for a fairly static portfolio (no additions and no withdrawals), which hardly ever happens in practise. Even here, an investor should be careful that the regular dividend reinvestments do not result in a portfolio that is tilted mostly toward the high-yielding dividend stocks.
I personally prefer to let our interest payments and dividends collect, add our regular savings to it and invest the proceeds periodically. Since I am going to pay the commissions when investing our savings anyway, this method works well for me. I look forward to comments from our readers on this topic.
