In the past I have preferred to accumulate all dividends that are distributed to me in my brokerage account. Then once a year or every other year I’d make a substantial position in a new stock. Typically, that stock or investment would be of higher risk. Mostly because, in a way, I felt like it was “free” money (as long as my underlying positions in the stocks where the dividends came from were performing well). Some of these ‘bets’ paid off and others did not.
However, since my focus now is more on accumulating a portfolio that will provide me with solid passive income in the some what distance future there is no need to make ‘bets.’ Instead, I’m better severed allowing all dividends to DRIP. Why is that??
- It’s a more, set it and forget it attitude, if you will. I don’t have to worry about making a purchase or researching a stock. Automatically once a dividend is distributed my brokerage purchases the stock.
- It saves on brokerage fees. DRIP is feel for the stocks I own.
- In a way, I see it as lowering my cost-per-share in the underlying stock. For example if I purchase 100 shares of a stock at $15 a share my cost basis is $1,500.00. But if that stock pays me 10% yield and the dividends are DRIPed, one year out I have 110 shares (assuming no change in price for simplicity’s sake). So my cost/share would be down around $13.64 ($1,500/110). Of course that $150 in dividends were really mine to spend. So technically it’s not lowering my cost-per-share. But since my hands are never on the cash and I’m not physically putting in new capital to purchase shares but getting. I chose to view it as lowing my cost-per-share. However, for this site, I track portfolio percentage gains/losses with and without dividend payments. If I don’t show DRIP purchases as increasing my cost basis it would be double dipping the dividends included number. As such, I will need to show it. Though now I think I will need to add a CASH basis calculation as well.
- Forced savings – if I took all the dividends as cash I may be inclined to use them for something other than investments.
As such, as of this May I have started DRIPs on all the stocks I own. Going forward I’ll record this in two different spots – in my Stock Purchases (noted as a DRIP) and of course in my Current Portfolio.