Dividend reinvestment strategy

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Dividend reinvestment strategy

Post by InvestorNewb » Fri Mar 08, 2013 2:14 pm


With dividend payments coming up soon, I'm trying to figure out the best strategy for reinvesting that money.

I have the following ETFs in my tax-advantaged accounts:
  • Vanguard REIT ETF (VNQ)
    MSCI Canada Index ETF (VCE)
For those two holdings, I plan on reinvesting the dividends back into their respective ETFs. I want to do this for growth and for tax reasons, but also to keep my accounts simple.

My "battle" lies with my taxable account, where I hold both VTI and VXUS.
  • 1) Should I take the dividends from VTI and VXUS and reinvest the money (as a DRIP would) back into the ETF in question?

    2) Or should I treat both dividends in the account as a "whole" and use the full amount to purchase more shares of only VTI or VXUS?
Given that VTI has outperformed international, my gut tells me that I should be buying more shares of VXUS. With the said, I don't like how international carries a higher level of risk.

I'm looking to know if there is an optimal strategy when it comes to reinvesting dividends.

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

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Re: Dividend reinvestment strategy

Post by avalpert » Fri Mar 08, 2013 3:14 pm

I just throw dividends into my monthly savings and invest as needed to get back to my desired allocation across asset classes. Assuming you have an asset allocation that reflects your risk/return desire than the optimal strategy is to use the new money to keep you on that asset allocation.

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Re: Dividend reinvestment strategy

Post by Clever_Username » Sat Mar 09, 2013 1:10 pm

Dividend postings are a great way to re-balance, or move closer to your desired allocation, without additional taxes. My taxable funds don't reinvest their dividends directly, but instead pay to my bank account (formerly to my MM account). I use that, coupled with whatever new contributions I'd be making that month, to realign them with my desired asset allocation.

In my case, my taxable funds are total stock market and total international stock market. I like to keep them in some ratio close to 7:3 (nothing magic, just that I decided, for whatever reason, that I wanted 30% of my stocks to be international). The dividends post, I figure out how much total I'll be contributing (since I'm adding monthly already), and I compute what 30% of the new total (existing value + this month's contributions, including "reinvested" dividends) is. I add to total international up to that difference (if it's not currently over 30%; that's yet to happen, but I suppose it could) and the rest into total U.S..

(I'm open to hearing if this is a bad strategy instead of just contributing 30:70 Int'l : U.S..)
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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Re: Dividend reinvestment strategy

Post by rfburns » Sat Mar 09, 2013 1:49 pm

You are correct. There are no tax repercussions for reinvesting dividends in sheltered accounts. But there are valid reasons to limit new purchases in taxable accounts to large round lots for accounting purposes. See the wiki:
http://www.bogleheads.org/wiki/Whether_ ... le_Account

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Re: Dividend reinvestment strategy

Post by northstar22 » Sat Mar 09, 2013 3:13 pm

Do you have an IPS? You should have a targeted international allocation and stay the course with it. If you're not comfortable with international, then don't have it or keep it a low percentage, but whatever you do, don't be constantly changing how much international to hold based on your current feelings about its level of risk.

As a sidenote, if it fact international stocks are more risky that would imply they will have a higher future return.

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