Question:
I’ve been listening, and I know you’re really focused on dividends these days. I’m curious on what you think of dividend reinvestment plans. Looking on line, it looks like I can get DRIPs of several of your recommended stocks. I’m looking for growth at the moment, and I’m not willing to take on a lot of risk. Any recommendations?
Answer:
Dividend reinvestment plans (DRIPs) are often marketed as a way for investors to build their stock holdings with little to no cost. An investor can start with a single share. Instead of receiving a cash dividend payout, the money is automatically used to purchase more shares, or even fractional shares of the stock. Many DRIPs will reinvest the money with no fees or reduced commissions.
We have seen many people come to us with numerous stock shares they have acquired through DRIPs. Fundamentally, there is nothing wrong with a DRIP. However, we do have two main concerns:
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- The accounting required to determine your cost basis can be a nightmare. If the company keeps a good accounting system, it can minimize your trouble. DRIP investing usually involves numerous small purchases over a long term—often several years. Each of the many purchases in a DRIP will carry its own cost basis. Therefore, it is extremely important to keep those year-end statements. Investors will also receive 1099 forms from their DRIP programs. While the dividend is reinvested, the cash payout is considered income, so you will owe taxes on the dividends.
- With a DRIP, you are not thinking about what price you are paying for the stock. While the regular reinvesting does mimic dollar cost averaging, your best buy might be elsewhere in the market.
For clients who reinvest their dividends, we let the dividends build up in an account and then we reinvest where needed to maintain a diversified portfolio. Not all companies offer DRIPs, so it is difficult to build a well-rounded portfolio. Focusing on DRIPs only, your portfolio might be heavily concentrated in Financials, Utilities and/or Consumer Discretionary stocks.
We also see many investors fall into the buy-and-forget habit with DRIPs. DRIPS are generally separate accounts from your other investments, so it is easy to forget to review your holdings. If the companies get in trouble and cut their dividend, your DRIP investment likely isn’t performing how you intended. This happened in 2008 when many financial companies cut their dividends.
DRIP programs can be good for children’s accounts to teach them about investing.
At Henssler Financial we believe you should Live Ready, which includes understanding how your investments fit in your overall plan. If you have questions regarding your investments the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166, or e-mail at experts@henssler.com.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
