Using DRIPs or re-investing manually?

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InvestorNewb
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Using DRIPs or re-investing manually?

Post by InvestorNewb » Sat Jan 19, 2013 12:38 pm

Hello,

I was wondering if using DRIPs is considered a more favorable approach than re-investing dividends manually. I like the idea of the dividends automatically purchasing more shares on the day they are issued. But at the same time, would it not be more beneficial to use the dividend payments as a re-balancing strategy? i.e. purchase more shares of the funds that have lost value, so that you can acquire more of them.

Thanks
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

livesoft
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Re: Using DRIPs or re-investing manually?

Post by livesoft » Sat Jan 19, 2013 12:45 pm

Unfortunately, dividends are NOT re-investing on the day they are issued unless you use mutual funds. Each broker does DRIPs differently, so you need to research how your broker does the dividend re-investing. For example, a broker knows it has 1,341 customers who have dividend reinvesting turned on for BND, so it collects the dividends, calculates the number shares it can buy, buys those shares, then turns around and marks up the shares by 1% and sells them to its 1,341 customers.

If you manually re-invest dividends, it can be a chore. Little turds of cash appear in your account from time to time. You just don't get around to re-investing and since you must buy integral numbers of shares, you never use all the dividend. Sometimes you win because the share price drops in value since you got the dividend and sometimes you lose since the share price has gone up.

I hope you get from my response that it's complicated. In the short-term, you never know if it will be good, bad, or ugly. Of course, if you just spend your dividends, then it's always good. :)

So I suggest you try both ways: For one of your funds, use DRIP. For another, use manual. See what you like.
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InvestorNewb
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Re: Using DRIPs or re-investing manually?

Post by InvestorNewb » Sun Jan 20, 2013 10:37 am

Thanks for the response. I found out that my broker doesn't offer a DRIPs program for US investments. So it looks like I will have to manually re-invest the dividends.

This is unfortunate because now I will have to pay $10 for each fund that I want to reinvest the dividends into. Given that the portfolio will be spread across multiple accounts (i.e. taxable, non-taxable) this will equate to more costs at each quarter.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

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SpringMan
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Re: Using DRIPs or re-investing manually?

Post by SpringMan » Sun Jan 20, 2013 10:49 am

If you have a mutual fund in each account, you should in most cases be able to invest in the fund without incurring any brokerage charge. I am assuming the $10 you are referring to is a brokerage charge to buy the ETF. Some mutual funds have a minimum for reinvesting but many do not. A mutual fund is a great way to unload those "little turds". :D
Best Wishes, SpringMan

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Re: Using DRIPs or re-investing manually?

Post by LadyGeek » Sun Jan 20, 2013 11:03 am

InvestorNewb wrote:I found out that my broker doesn't offer a DRIPs program for US investments.
Hi,

Remember that unless otherwise mentioned, members here assume that investors are US based. It would help to state that you are a Canadian resident, as there may be some subtle differences that you were not aware of.

In this case, our sister Canadian site's wiki can help: Dividend Reinvestment Plan - finiki, the Canadian financial Wiki
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livesoft
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Re: Using DRIPs or re-investing manually?

Post by livesoft » Sun Jan 20, 2013 8:04 pm

That finiki article is about a different kind of DRIP that does not apply to the OPs situation. Indeed, the article is about anachronistic DRIPs of single company stocks which no one should want to participate in anymore nor should they even have a need to do so.
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Re: Using DRIPs or re-investing manually?

Post by sscritic » Sun Jan 20, 2013 8:23 pm

livesoft wrote:That finiki article is about a different kind of DRIP that does not apply to the OPs situation. Indeed, the article is about anachronistic DRIPs of single company stocks which no one should want to participate in anymore nor should they even have a need to do so.
If you want to own shares in a single stock, it's not a bad way to go, but then I am pretty anachronistic myself. I liked the discount. I liked that I could add money to be pooled with other money so the commission was next to nothing (I know, you don't pay commissions, but some people do). I also know that you don't like average basis, but DRIP holdings are the only way to use average basis with a single stock that I know of.

I don't have one now, but that's because I don't own single stocks anymore. The one I had was a gift from my father, and I signed up for the DRIP.

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Re: Using DRIPs or re-investing manually?

Post by livesoft » Sun Jan 20, 2013 8:32 pm

I didn't know that one could use "average basis" with a stock.
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Re: Using DRIPs or re-investing manually?

Post by sscritic » Sun Jan 20, 2013 9:17 pm

livesoft wrote:I didn't know that one could use "average basis" with a stock.
Oh, what I could teach you. :)
(1) In general. Notwithstanding paragraph (c) of this section, and except as provided in paragraph (e)(8) of this section, a taxpayer may use the average basis method described in paragraph (e)(7) of this section to determine the cost or other basis of identical shares of stock if
(i) The taxpayer leaves shares of stock in a regulated investment company (as defined in paragraph (e)(5) of this section) or shares of stock acquired after December 31, 2010, in connection with a dividend reinvestment plan (as defined in paragraph (e)(6) of this section) with a custodian or agent in an account maintained for the acquisition or redemption, sale, or other disposition of shares of the stock; and
(ii) The taxpayer acquires identical shares of stock at different prices or bases in the account.
For purposes of this paragraph (e), the term dividend reinvestment plan means any written plan, arrangement, or program under which at least 10 percent of every dividend (within the meaning of section 316) on any share of stock is reinvested in stock identical to the stock on which the dividend is paid. A plan is a dividend reinvestment plan if the plan documents require that at least 10 percent of any dividend paid is reinvested in identical stock even if the plan includes stock on which no dividends have ever been declared or paid or on which an issuer ceases paying dividends. A plan that holds one or more different stocks may permit a taxpayer to reinvest a different percentage of dividends in the stocks held. A dividend reinvestment plan may reinvest other distributions on stock, such as capital gain distributions, non-taxable returns of capital, and cash in lieu of fractional shares. The term dividend reinvestment plan includes both issuer administered dividend reinvestment plans and non-issuer administered dividend reinvestment plans.
Shares of stock acquired in connection with a dividend reinvestment plan include the initial purchase of stock in the dividend reinvestment plan, transfers of identical stock into the dividend reinvestment plan, additional periodic purchases of identical stock in the dividend reinvestment plan, and identical stock acquired through reinvestment of the dividends or other distributions paid on the stock held in the plan.

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DiscoBunny1979
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Re: Using DRIPs or re-investing manually?

Post by DiscoBunny1979 » Sun Jan 20, 2013 9:35 pm

InvestorNewb wrote:Hello,

I was wondering if using DRIPs is considered a more favorable approach than re-investing dividends manually. I like the idea of the dividends automatically purchasing more shares on the day they are issued. But at the same time, would it not be more beneficial to use the dividend payments as a re-balancing strategy? i.e. purchase more shares of the funds that have lost value, so that you can acquire more of them.

Thanks
------

And now a different answer.

I've found DRIPs are best done through either the Transfer Agent or when buying direct through the company. For instance, at one time you could have bought directly from COP's TransferAgent, no fees for reinvestment, no fees for account management, no fees for additional purchases. The dividends were invested within a short period of when received for everyone participating. In my case, when I participated in the COP DRIP program, it was simple, accurate and fun. But . . . re-investing manually as a more 'favorable approach' has a hint of market timing. With DRIPs, it's a matter of time holding the shares where one makes money when compounding can work in one's favor. Using the DRIP program to invest for you can be hit and miss. If the market is on an upswing, you'll be buying at higher prices. If the market is correcting, more at a lower price.

Another way to participate in a DRIP (as you probably are well aware) is to buy direct from the company - like Disney or Proctor/Gamble both have had direct purchase programs whereas dividends were reinvested for you. In my opinion, that's a better approach then having dividends credited to some account and 'waiting' for a better time to buy. Of course many prefer to use a brokerage firm to hold all their shares of different companies in one location. That's ok. It's just not necessarily easier - especially if they don't reinvest fractional shares - like most DRIP programs when bought through a Transfer Agent does.

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Re: Using DRIPs or re-investing manually?

Post by JW-Retired » Sun Jan 20, 2013 9:47 pm

DRIPS are kind of a 1970's way to invest. I did it in the 70's & 80's. It got to be a worse deal as time went on. Originally there were no commissions and some other price breaks that I can't recall now. Then all that went away and commissions on the small share lots became onerous. I finally stopped all of it and sold all the individual stocks except the ones with such gains that I could not face selling them.

It was also a royal pain to keep track of the quarterly lot cost basis. Just invest in mutual funds...... much easier and more diversified.
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Re: Using DRIPs or re-investing manually?

Post by DSInvestor » Sun Jan 20, 2013 10:14 pm

Maybe you should consider using Canadian based index mutual funds like TD e-series funds. You can automate purchases and reinvest dividends. Instead of 3 fund portfolio of VTI, VXUS/VEU and BND, you can use something like:

TD Canadian Bond Index-e MER=0.51%
TD Canadian Index-e MER=0.33%
TD US Index-e MER=0.35%
TD International Index-e MER=0.51%

The management expense ratios (MER) are higher than Vanguard's but still reasonable.

TD e-series funds can be held in registered (TFSA, RRSP) and non-registered accounts. You may need to open investment accounts at TD Waterhouse or TD Canada Trust.
http://www.tdcanadatrust.com/products-s ... -funds.jsp

Another option is to see if your brokerage will reinvest dividends for ETFs based in Canada (e.g. iShares Canada)
http://ca.ishares.com/home.htm
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