Thursday, November 8, 2012

Why I Don't Like Dividend Reinvestment Plans

In my last post I discussed dividend reinvestment plans.  I know they are popular with some investors - in fact a quick search on Google yielded a number a websites devoted entirely to dividend reinvestment.  And while I can understand the attraction for some investors, DRPs are not for me.

So in this post I will discuss some of the disadvantages that I see with these plans.

To recap, a DRP allows existing shareholders to increase their holding by forgoing their cash dividend payments in exchange for new shares in the company.  There is no brokerage payable and to top it off, the shares are sometimes issued at a discount to the current market price.

So what's not to like?

Don't get me wrong.  There's nothing fundamentally wrong with dividend reinvestment plans.  It's just that they don't suit me.

Buying Shares When I Want To

I like to choose when and where I invest my money.  Dividend reinvestment limits my ability to do that.

Under most plans, shares are issued a couple of times each year at whatever the market price happens to be when the dividend is paid.  It could be that at the time the shares are issued (and therefore the price is set) I consider the shares to be too expensive.  There could be another company I'd rather invest my money in.  Or I might consider the market overall to be too high.  I might like to hold onto the cash for a while until a suitable investment opportunity arises.

By participating in dividend reinvestment plans, I lose that flexibility - the flexibility to buy the stock I want at a price I think is reasonable.  Instead, I have to take whatever the market says the price should be at the time the dividend is paid.

Too Much Paperwork

When you're being allocated small parcels of shares, a couple of times each year, under multiple DRPs - there's a lot of stuff to keep track of.

While this may seem trivial to those of you with superhuman powers of organization, for the just of us it can be a real hassle.

I admit it.  I'm not terribly well organized.  I love researching little-known companies, reaching for value in obscure places and relaxing while watching my stock portfolio grow.  But the administration side of things bores me to tears.

I dread tax time - the time when I need to find all of the documents which tell me which shares I bought and sold, at what price and when.  And this is where dividend reinvestment plans can be a pain.  Imagine I own shares in a company for 10 years and in each of those years the company pays 2 dividends and for each of those dividends I participate in the DRP - that's 20 individual purchases, plus the initial purchase.  That's 20 different capital gains calculations (I still do my own tax).  That's a nightmare.

Okay.  So maybe I could be a little more organized.  Maybe then tax time wouldn't be such a pain.  But it's still something you need to think about.

Don't Just Buy For The DRP

There are lots of factors to look at before making an investment in the share market. If you do like the idea of dividend reinvestment, by wary of allowing this the cloud your judgement.  With any prospective investment I'm always weighing up the price I have pay against the value I'll get.  To me, DRPs are a very small part of the value side of the equation.

I'll leave you with one last thought.  If you elect to take your dividends in cash like I do, then make sure you don't let them go to waste.  I make sure any income from dividends gets held separately from my day to day spending money.  I still want to reinvest them - just on my own terms.

As I said at the beginning of this post, I know that dividend reinvestment plans are popular amongst some investors.  I'd be curious to hear what others think.  Do you like DRPs?  Why? Or why not?