Dividend reinvestment plans or DRIPs allow you to take dividend payments and reinvest them in shares of stock. If you don’t need the immediate income provided by a dividend paying stock then DRIPs give you a zero thought zero hassle way of increasing your equity in a corporation and thereby increasing the dividends you earn from it over time.
DRIPs are to dividend investing what compound interest is to your savings account!
But, are dividends from one corporation best invested back into that corporation’s stock or somewhere else?
A well-diversified investment portfolio is going to have stocks representing a variety of industries, market sectors, and risk exposures. You might have a portion of your capital in a lower yield dividend paying stock because that dividend has been constant for decades and it provides a low risk base for your portfolio. It’s not exciting and the dividend may not be growing as much as other stocks you own but it’s a solid plank in your foundation.
Should the dividends from that lower yield stock be reinvested back into shares of that stock itself? Is that where those dividends provide the best value for your portfolio?
It’s up to you to answer that question based on your own unique circumstances but you may want to consider pooling your dividends over the course of several quarters and intelligently allocating them vs. simply letting them reinvest into the stocks from which they were generated. It will take a little more of your time than using a DRIP but, considering you’re only doing this once or twice per year, the sacrifice isn’t too great.
If you don’t need the income immediately and you know you’re not going to want to manage dividend reinvestment yourself then DRIPs are a better option than simply taking dividends as income or letting them accumulate in the cash portion of your brokerage account. But it’s worth it to consider active dividend reinvestment considering the potential long term impact of ensuring that your dividends are getting reinvested into the stocks that are your better performers vs. the stocks that you use for stability.
