Dividend Reinvestment Plans, Part 2 - The Case Against DRIPs
Monty Spivak submits: In Part 1 of this article, we explored the benefits of using a Dividend Reinvestment Plan (DRIP) approach to improve investment returns through cost-averaging. In Part 2, we will explore the opposite perspective of how DRIPs may reduce your investment returns. Let me start off by stating that I am aware that this is an unpopular topic – there are many people who are avid DRIP investors. The purpose of this second article is not to deny the value of DRIPs; rather it is to identify circumstances where DRIPs provide the investor less value.There are several reasons not to participate in DRIPs. The down-side of inconveniences and certain costs are well-explained in the article “Are Drips Worth It?”. However, most of the costs that are identified are minor (for example, the transaction cost of one trade), or about record-keeping (the investor must keep track of cost basis for many small purchases of stock in order to calculate capital gains). Other articles raise issues such as creation of odd lots (not buying shares in multiples of 100) may cause a higher purchase/sale fees. One discussed how stock dividends - dividends paid in the form of stock for all shareholders – receive a more favourable tax treatment than DRIPs (where one must choose to participate in the dividend reinvestment). I propose that these are interesting reasons, but not compelling ones.Complete Story »
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