Saturday, 31 May 2014

Automatic or Targeted Dividend Reinvestment?

Automatic dividend reinvestment or not? It is a question I have asked myself a lot recently.

Do I allow my broker simply to automatically reinvest my dividends into the stock from which it came or do I amass it in my brokerage account until it reaches a value worth reinvesting and find a likely candidate?

There are benefits to both approaches. Automatic reinvestment is:

  • just allow the broker to do the job for you without any input on your part. With targeted investment you would need to spend time researching the best new investment.
  • If the stock prices drop then you are able to capitalise immediately on this drop through the reinvestment of the funds.

For targeted reinvestment you also have a number of advantages:

  • Reduced fees usually. My usual investment usually incurs fees of about 1.5% per transaction. However, with automatic reinvestment this is about 2.5%--a noticeable amount!
  • Flexibility to pick value stocks. Obviously, automatic reinvestment will put your money back into the stock whether you would consider it over or under valued. However, with targeted reinvestment you can send it all towards what you consider as 'value' stocks.

As it stands, I have my account set to automatic reinvestment. However, this is chiefly because currently my portfolio does not yield enough to offer me a healthy dividend pot at regular intervals to make such investment good value. 

I prefer to invest in £500 segments and it would take months for such a pot to be created. As such, it is currently cheaper (fees wise) to have the funds immediately reinvested. However, once my dividends amount to a sum worth investing in a targeted manner and economically I will no doubt shift to that approach.

What is more, currently most of my holdings have not changed dramatically from my purchase price (or, if they have, it has been downwards). As a result, I still see them as viable and solid investments.

What do you think?

How do you handle dividend reinvestments? Do you tend to have them automatically done via DRIP or other automatic facilities? Or do you manage them yourself?

[Creative Commons image reproduced from Flickr user Rob Gallop]

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