Morning all,
I'd like to know if there is a strategy to how to reinvest dividends. I'll definitely reinvest but I'm not sure if I should be reinvesting in the same shares or if I should save up all of the divis and then invest in a new share,
Reinvesting in the same share costs a lot less than the commission charge of normal dealing but are there any other reasons why I would reinvest in the same share?
Thanks on advance for your help.
Hi mp.
I agree dividend reinvestment is a good discipline to get into. If you don’t need the dividend income for regular expenditure it can be a good way of saving without actively having to put new money aside. I’ve found over the years that compounding is a big driver of investment returns and some of my larger holdings have been built up from participating in the DRIP (Dividend Reinvestment Plans) programs offered by the likes of Royal Dutch Shell (LON:RDSB) and Vodafone (LON:VOD) . These are shares I’ve been happy to buy and hold more or less indefinitely and enjoy the longer term benefit of accumulating proportionately more shares when the share price has fallen. Presumably you’re happy with the shares you already hold, so intuitively it makes sense to roll the dividends into the same shares. The counter argument is that over time you potentially concentrate your portfolio into your high dividend payers and could achieve better diversification by investing in new shares.
As you say, DRIP’s are usually quite a cheap way of reinvesting (usually done at a mid market price and with a low minimum commission of c.£2.50 and if relevant any Stamp Duty). This said, I’ve found that for either small holdings and/or low dividend yields, DRIP participation can be quite expensive. For example, say you had a £2,500 holding in a share paying semi annual dividends of 2% per annum, this would give you 2x a £25 capital sum per year. On such a small sum, a £2.50 commission would be eating up about 10% of your income so quite expensive. In addition, if you have any “stub” left after a whole number of shares has been purchased this sits in limbo until future dividends give you enough cash to buy more shares, another inefficiency especially in shares with a high value share price.
For a while, I had an arrangement with my broker where I was automatically enrolled into any DRIP scheme offered by companies whose shares I held but I found that due to a large number of relatively small positions, the ongoing costs were quite dilutive of overall returns. Unfortunately the broker only offer a “binary” arrangement where it’s either all or none so I can’t selectively apply a DRIP election to my larger holdings only, so I’ve reverted to having the cash paid into the investment account and then using it from time to time for general share purchases.
Ultimately, no particular right answer. Just depends on your own particular circumstances and risk appetite.
Gus.
