After reading some of the negative comments to my Me & My Money article in the Globe and Mail from July 23rd, I thought it would be interesting to play the devil’s advocate to my dividend investing approach. Is there a blind madness to my financial independence method? Is the devil whispering in my ear correct – if I continue on my dividend investing journey will a ball of fire engulf me whole? OK, maybe too drastic. I don’t expect everyone to be sold on the benefits of dividend investing or DRIPs. Not everyone needs to be a “believer” and the devil is certainly correct about some things. So today’s post takes the devil’s advocate position with DRIPing, why it’s not in favour with many investors but I will also take this opportunity to explain to the devil what he might not know about full plans with Share Purchase Plans (SPPs) or even synthetic plans with brokerage accounts. If you’re going to be a critic, you should understand both sides of the story…shouldn’t you?
What the angry soul with the horns-on-fire is saying:
1. In a full DRIP you can’t control the price or timing of the dividend reinvestment purchase.
2. In a full DRIP you are not using dividend income to be strategic; buying more shares when the stock price is attractive to you.
3. Setting up a full DRIP is work and time consuming.
4. To set up a full DRIP, in some cases, there are costs to buy shares and get the share certificated.
5. Even with a synthetic DRIP (in a brokerage account) you need enough dividend income to buy one full share.
6. You need good accounting skills to keep track of your adjusted cost base; especially when you sell your stocks.
7. Some full DRIPs with SPPs have minimum purchase requirements (e.g., $100/stock/quarter). 8. You can’t own the best companies since they don’t all offer full DRIPs.
9. There are notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions.
What the calm investor is saying back to the angry soul in the funny red suit:
1. Yes, you don’t control the price of the dividend reinvestment purchase but you can make use of full DRIPs with SPPs to make strategic purchases when the stock price is right for you.
2. Full DRIPs provide dollar-cost averaging (Don’t most financial experts recommend DCA?)
3. Full DRIPs allow you to buy partial shares (This accelerates your stock ownership (and your wealth)).
4. Full DRIPs have little to zero transaction fees.
5. Full DRIPs take advantage of compounding (Didn’t Einstein say compound interest was the greatest mathematical discovery of all time? Who’s to argue him?)
6. Using the transfer agents, if you want a share certificated, it doesn’t cost you anything.
7. Many great stocks (contrary to the devil’s thinking) do offer full DRIPs with SPPs.
8. Many great stocks have SPPs with no minimum purchase requirement (How many people can afford to buy $5,000 worth of stock at one time?)
9. Yes, you need to keep track of your adjusted cost base but then again capital gains only occurs when you sell a stock (If you own great stocks you wouldn’t need to sell them very often!)
10. Full DRIPs are always working so you don’t have to someday.
11. You can “turn off” your DRIP, easily, when you want to and get the dividend income instead.
12. Full DRIPs encourage you to save money.
13. Full DRIPs can help take the emotion out of investing.
14. Full DRIPs can be a great “set and forget” wealth building plan.
15. Relax (dear devil), it’s NOT the ONLY WAY to invest!
Full DRIPs with SPPs or even synthetic DRIPs in brokerage accounts offer many pros and cons. (What investing choice doesn’t have benefits or risks?) Although the devil with his hair on fire makes some strong points, I believe there are considerable advantages to dividend investing; how full DRIPs with SPPs can be used to build wealth. My Globe and Mail article on July 23rd didn’t say it was full DRIPs or nothing – it’s not this way or no way. It said:
“First and foremost, I consider myself a dividend investor who predominantly invests in established companies that have a history of paying dividends.” I use “full DRIPs…to buy partial stock shares each quarter the dividends are paid.” For me, it’s an excellent way to build stock ownership over time, month after month, to compliment my other investment approaches which combined are getting me closer every day to financial independence.
DRIPing is not the only investment strategy around just one of the best I know.
Are the horns on or off, when it comes to DRIPing for you?