Dividend Investing: Pros and Cons of DRIPS (Dividend Reinvestment Plans)

when we’re talking about drips we’re not
talking about a leaky faucet no! no! drip stands for dividend reinvestment plants
in 2018 drips are becoming highly popular among investors and have a lot
of great benefits but before you dive in and engage in one of these investment
strategies it’s important to know the pros and the cons if you don’t know how
drips work don’t worry it’s it’s fairly simple to explain let’s say a
shareholder owns one stock once you’re a stock of McDonald’s
well McDonald’s is a company that normally pays dividends now when
McDonald’s pays dividends normally that shareholder would receive that dividend
payment in the form of cash that cash dividend would be deposited directly
into their brokerage account now let’s explain how that works in a drip
arrangement when McDonald’s goes to pay that dividend instead of sending that
cash payment dividend to that shareholder what will happen under the
drip arrangement is that dividend payment will go automatically to
repurchase more shares of McDonald’s stock even if the shareholder doesn’t
have enough to purchase a whole share of McDonald’s stock there under the drip
arrangement they’re able to purchase fractional shares of McDonald’s stock so
basically as you can see in the example under a drip investment strategy instead
of getting dividend payments in the form of cash you’re automatically having your
cash reinvested into that company stock now let’s talk about those pros and cons
the first major pro of having your investments in the drip type of
arrangement is that you have the potential for faster compounding
interest under a drip plan you don’t have to worry about money going into
your brokerage account from dividends and just sitting there idle no that
doesn’t happen so your money as in that McDonald’s stock example we just talked
about gets automatically reinvested for you without you doing anything at the
date of the dividend distribution so your money is quickly being reinvested
immediately which in the long run helps add to the compounding interest boost
that so many investors are looking for one of the coolest things about drips is
that they’re pretty much open to all investors you don’t it doesn’t matter if
you’re a big investor in small investor you can own as little as one share of
stock if a company off a drip and get involved and enrolled in
that drip investing strategy so rich or poor folks doesn’t matter you can start
investing this way starting immediately the third Pro is that under a dipper
range meant when those when those dividends are used to be reinvested to
repurchase more shares of that company stock it usually occurs with under most
situations with little to no investment transaction fee that’s right you’re
saving money on fees we all know we’re looking fees so if you’re a drip
investor that’s a very good thing working in your favor
the fourth pro of investing in a drip plan is that under some circumstances
now not all companies offer this but many do is that if you’re enrolled in a
drip plan with that company let’s say McDonald’s for example that sometimes as
a shareholder you can have your dividends reinvested and when you go to
purchase those reinvested shares or when those dividends are used to repurchase
more shares you sometimes can the company will offer you a discount on
those share repurchases and I’ve seen discounts ranging anywhere from one to
ten percent so it’s not for every company but me up companies will offer
you discounts if you’re enrolled in their plan to constantly reinvest your
dividends into their company stock the fifth pro of having a drip investing
strategy is it’s low maintenance right now when you’re enrolled in a drip
investing plan you don’t have to worry about trying to figure out where to
invest your dividends because it’s being taken care of for you so you can do
other things like go play fortnight or if you’re messed up like me you can
reinstall and play Diablo 2 once again after 17 years so those were the five
pros now let’s talk about those pesky cons the first con when it comes to drip
investing is that your investments might lose some flexibility what do I mean
well if you think about it if you constantly have your dividends being
repurchasing the same shares over and over again your portfolio might
eventually start to lack diversification and not only that because you’re
enrolled in a special drip investing plan your investments may become less
liquid so if you see the market going up or down and if you want to sell
quickly you might not be able to it might take you more than a day to sell
or maybe a week to sell I don’t know it just depends on the company but you’re
gonna lose some of that liquidity with your investment when it’s enrolled in
the drip plan the second con is one of the biggest ones is that you don’t
receive the physical cash right because that cash is reinvested to purchase more
shares but in the eyes of the IRS you still have to pay tax on that because
the IRS says well even though you decided not to take the cash mr.
investor you have to pay tax on those dividends and in terms of taxes those
drip dividends that are reinvested or reinvested dividends are taxed just like
any other normal dividends so if you’re planning to reinvest most of your
dividends and to these drip plans with these different companies realize that
you better have other income to help pay the taxes when you go to file your tax
return because you’re gonna have to pay taxes on those dividends when it comes
to tax filing season many people do not realize that the third ton of drip
investing is related to tax as well in that it can create messy record-keeping
are more complicated record-keeping so what happens when you invest in a drip
plan when you and I invest in one of these plans the brokerage company or
with let’s say your with TD Ameritrade or Robin Hood well once you’re into one
of these drip investing plans with let’s say McDonald’s or Johnson & Johnson
whatever your brokerage company is probably no longer gonna be able to keep
track of all these reinvested dividends and so if you ever want to go to sell
that stock you’re not going to have proper cost basis records unless you’ve
been keeping track of your cost basis the whole time so what you want to do
knowing that you’re gonna go into one of these plans if this is something you
want to do I will tell you what you want to do is write down your initial cost
basis of that stock so your initial purchase price that that stock and then
once it’s in the drip plan and you start getting those reinvested dividend
amounts keep track of all those reinvested amounts that are used to
repurchase shares because you have to know when you when you go to sell or if
you eventually want to sell that investment you’re going to want to know
your initial purchase price plus the value of
all those reinvested dividends and some of them goes on for years and I’ve seen
it firsthand because you guys know I prepare taxes for a living and it does
get pretty messy so just so you know make sure you’re keeping good records
and track of your cost basis so that when you go to sell your stock you’re
not gonna pay more tax than you need to Khan number four drips they’re really
not for short-term investors if you’re getting involved in one of these plans
you’re thinking long term you’re going long okay so it’s like I said earlier
it’s they’re not very flexible so if you can’t quickly get in and out of these
things these are long-term arrangements and each company might have different
restrictions that allow drip plants so just keep that in mind if you’re
thinking you just want to be a short-term investor and maybe you want
to invest for less than the year a couple years it might not even be worth
it to get involved in one of these plants the fifth and final con and it’s
one of my biggest pet peeves about these investing strategies is that your
dividend payments you you might not be getting the highest and best use of your
cash dividends you so you have to realize what if you’re having your cash
dividend payments automatically reinvest it in these same stocks over and over
again what if you know what could you have done differently with that money or
with those dividends if you would have just received it in the form of cash
could you have done better you have to think about this because you have done
better investing in other companies with those dividends so just because you’re
constantly repurchase is seamless Seamus there is a stock it doesn’t necessarily
mean you’re buying the best investment over and over again
so in summary drips can be a great investing tool for long-term investors
drips can minimize transaction cost and it may allow you to purchase some stocks
at a discount and allow even the smallest investors to participate just
by owning a single share of stock having your dividends automatically reinvested
will further fuel the compounding interest growth of an investor’s
portfolio but remember a drip comes with a price the price is the investments
become less liquid your dividends may not be receiving highest and best use
tax record-keeping becomes more complicated and an investor will have to
pay tax on the reinvested dividends even though
not receive the money now that you guys know the pros and cons when it comes to
drips what are your thoughts do you think they’re a good idea do you think
you’re a bad idea who do you think would benefit from them why or why not let me
know all of your thoughts down in that comment section down below I would love
to read what you guys have to say about these things in the comment section down
below I’ll be leaving my overall summary and conclusion on drips so make sure to
read it and check it out and let me know what you guys think well guys that is
all the information I have for you today make sure if you have not seen some of
my other dividend investing videos I will link them up here in this card and
also down in the description section down below I have a whole playlist
dedicated to just dividend investing and I’m gonna continue to grow this playlist
over time you know if you guys like this video if you want to see more content
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out with chipper and I once again on money in life TV it is always so much
fun to interact with each and every one of you and to learn about your different
investing strategies and what you have going on in your life so until next time
use this information to live your life on caged I will see you guys in the next
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