Jon and I both love dividend paying stocks, and we like to take our dividends and reinvest them.
But we don’t do it the same way. I follow a traditional dividend reinvestment strategy, but Jon has his own quirky dividend reinvestment plan that works for him. They both have advantages and disadvantages, and while neither will work for everyone, they both work for us because we aren’t the same investor.
You aren’t the same investor either. But if you’re curious about a dividend reinvestment, or liked the concept but thought it could use a tweak or two, or just wonder why a couple wouldn’t follow the same investment strategy, read on!
Traditional Dividend Reinvestment Strategy
I am a traditionalist, and I follow traditional dividend reinvestment plans (DRiPs). I pick a solid dividend paying stock, buy it, and let it ride. If I get a dividend, it automatically goes for more of the same stock.
Let me give you an example.
On May 16, 2013, I bought 73 shares of Johnson and Johnson (JNJ).
In the intervening years, JNJ has paid me $769.46 in dividends. All have been reinvested, and the price and dividends have been such that I can generally pick up a new full share with every other dividend. I now hold 80.63 shares valued at $117.76 each.
In three years, the value of this particular investment grew 46% and I did nothing but wait.
Sure, the value of my stock might drop. But JNJ is one of the dividend aristocrats, and their dividend has grown steadily since 1963. Right now, each share pays out $3.20 a year, or 2.69% of the current price. If the price drops, my $256 a year will buy additional shares faster and thus increase my dividend payout.
That means I’m a lot less bothered by the threat of a bear market than I might otherwise be. I can focus on the growth in shares and dividend yield instead of just my dropping account balance. I can enjoy the roller coaster whether it’s creeping up or whooshing down.
Okay, the Whooshing Down is still kinda scary. Just not AS scary.
Because the transaction is automatic, I’m not paying any transaction fees on buying stock from dividend proceeds. My holdings grow. I pay a little bit of income tax each year on dividends. Almost all of our dividend income is taxed at the lower qualified rates, though, so it doesn’t hurt as much as it might.
Advantages of a Traditional Dividend Reinvestment Strategy
- No worries! Everything’s automatic.
- Constant, consistent reinvestment means that you benefit whether the market goes up or down.
- No fee to reinvest the dividends.
Disadvantages of a Traditional Dividend Reinvestment Strategy
- Automatic transactions mean you might be missing better opportunities. You need to make very good initial purchasing decisions and keep up with performance despite the fact that your reinvestment is automatic.
- Your money is tied up with additional stock purchases.
Jon’s Dividend Reinvestment Strategy
Jon does follows a non-automatic dividend reinvestment strategy. He still researches his stock picks and tries to pick good companies. He still doesn’t plan on taking the dividend cash out of his account (and we’re still paying the taxes on the dividends!)
But he doesn’t set his account to automatically reinvest the dividends in the company that sent them. Instead, he takes the dividends and squirrels them away in his investment account. After enough money has accumulated, he starts looking for a new investment opportunity he’d like to pursue. Once he identifies his opportunity, he uses his accumulated dividends to make the purchase.
His dividend reinvestment strategy gives him flexibility, control, and more opportunities for diversification. If he sees an opportunity he wants to pursue, he has the ready cash to do so. If he doesn’t, he sits and waits.
The big disadvantage of Jon’s strategy is that he isn’t earning much on his cash. It’s not going to work until he puts it to work, and that flexibility can cost if he doesn’t find a better buying opportunity.
With luck and good timing, he can do well. With bad luck and ill timing, his return isn’t quite as good.
Jon also has to pay for all of his stock purchases. While Vanguard doesn’t charge a huge amount to buy stocks, it’s still a fee Jon pays that I don’t.
So Why Are We Doing This?
Your investment strategy has to fit you.
I love my strategy, and Jon loves his. So we have carefully kept our investment accounts and strategies separate, even though we discuss them and are working toward the same goal: building wealth for a comfortable retirement.
I feel that I have a diverse set of solid stock holdings. I want them to grow, but I’m happy with what I have. Putting my accounts on automatic reinvestment works for me.
Jon has put more of his investment resources into real estate, and doesn’t feel his stock holdings are diversified enough. Following his strategy allows him to pick up additional stocks without selling the holdings he holds and likes. He still reinvests all of his dividends, he just controls the reinvestment.
So we do what we do, and we’re each comfortable with that. We move toward a funded future either way.
Do you follow the same investment strategy as your significant other, or do you each go your own way with common goals?