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Wow, we are getting to the end in series of posts titled, The Dividend Guy Investment Process. Today’s post is going to talk about something that I am very passionate about – reinvesting dividends!
When an investor receives dividends from a dividend stock, they have two choices. The first is to take the dividends as cash and accumulate them in a brokerage account as cash to be withdrawn at a later date. The second option is to immediately take those dividend payments and use them to purchase more stocks, either in the same company or into another company. My choice is to take the dividend payments and accumulate them and buy the asset that is most out of balance within my target asset allocation.
My rationale for reinvesting my dividends is best described in an article I came across on the AIC website (pdf). The image below explains it all – from 1982 the TSX index returned 863% without reinvesting dividends and 1,705% with dividends reinvested. That equates to a lot of additional value created because of the reinvestment of dividends.
Click to EnlargeThe next post in the series will be the last and will show my portfolio makeup and review I do on a monthly basis.
Hi: I am new to purchasing dividend paying stocks. I have looked into your link to CSA. Other than reinvesting your dividend payments, why else do you use CSA. Don’t you feel limited by only being able to invest in the pre-screened securities offered vs other online brokerages which allow a greater selection?
Thank you for your feedback.
Your blog helps out a great deal.
I do feel limited at times. I am in the process of opening an eTrade account for other stocks/etfs I am looking at. Overall though, the CSA provides a lot of the good dividend growth stocks – JNJ, KO, PEP, RY. I have not found much need to this point, but perhaps will in the future, hence the eTrade account. Trouble with the other brokerages is they don’t do reinvestment into fractional shares. That is a big deal for me.
Thanks for the comment.
TDG
I have avoided reinvesting my dividends for one reason, but I don’t even know if it is valid. I have had a ShareBuilder account for several years and I also have a Scottrade IRA account. My hesitation was due to possible tax ramifications. I have not sold any stocks, so I have not had to deal with it yet.
If I reinvest my dividends, when I sell the stock, do I have to list each purchase on my tax return. If I have a stock that pays dividends every quarter, then I also make a purchase of that stock every quarter if I’m reinvesting dividends. So when I sell, am I going to have to document 4 purchases for each year I owned that stock? I have 25-30 stocks and many pay dividends, so this seems like it could be tedious.
Right now, I just let the money roll into my money market account and when that accumulates enough, I make one larger purchase. Let me know what you think.
Hi, in response to a comment you wrote, “I am in the process of opening an eTrade account for other stocks/etfs I am looking at.”
I’m sure you’re aware that ETrade has some problems right now with liquidity. Since you’re opening an account, however, I don’t think you know the extent of those problems.
I know a few people who have money in their ETrade accounts and are unable to take it out. ETrade does not let them. Withdrawl requests are met either with complete unresponsiveness or excuses. Perhaps these are isolated cases, but do be careful.
DEAR DIVIDEND GUY,
I AM 36 YEARS OLD CANADIAN CITIZEN, LOOKING TO PLAN AHEAD FOR MY RETIREMENT AS BEST I CAN. I HAVE A VERY LIMITED UNDERSTANDING OF DIVIDEND STOCKS AND WHERE TO BEGIN TO LEARN. CAN YOU HELP…WHAT DO I NEED TO KNOW?
I HAVE SOME MONEY COMING FROM THE SALE OF REVENUE PROPERTIES & WOULD LIKE TO INVEST IT WISELY!
THANKS!
Great series. I just wrote a post on this very topic and if you are holding onto the stock of a company and they offer a DRIP then the only reason you would NOT participate is if you believe the compnay’s future is bleak. Then you need to ask yourself the question as to why you are still invested in the company.
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I always thought that when I was reinvesting the dividends with Bell, that I was buying more common stock. Now when is comes time to cash in, I learn that the reinvested dividends are worth about half of the value of the Common Stock. Can you explain to me how this happened. Thanks
I wonder when you reinvest the dividends do you invest them back to the same company or to any of the company in your portfolio or it doesn’t matter? Currently I do not reinvest into same fund or stock which generated the dividend but leave it in my account and invest it in my next addition to the existing positions. What do you think?
Like you, I leave them in the account and direct them to whatever assets I need to focus on to ensure my asset allocation is where it should be. I used to reinvest the dividends into the company that generated them, but that was because my broker allowed fractional shares. However, I also like the process of allocating the dividends to the areas that need the focus. These tend to be the areas that are at their lowest so over the longer term I have seen additional gains.
Matthew stated this in the comments in 2008…”If I reinvest my dividends, when I sell the stock, do I have to list each purchase on my tax return. If I have a stock that pays dividends every quarter, then I also make a purchase of that stock every quarter if I’m reinvesting dividends. So when I sell, am I going to have to document 4 purchases for each year I owned that stock?”
I find myself in this bind now, having sold a mutual fund that I had the dividends reinvested. I declared the dividend amount each tax year. When I sell, I assume I only declare the original purchase amount as I have already declared the dividends. Is this correct?
Thanks