Why I Stopped My Dividend Reinvestment Plan
A few months ago I stopped the dividend reinvestment plan for most of my shares. So I thought I would share the reasoning behind that decision. It’s not a huge decision, but it is one that I feel strongly about. Or at least feel strongly about now, who knows what changes tomorrow will bring. It really comes down to a few points that helped me align my investments with my goals. If you are interested in some additional pros and cons then this ASX article contains a nice list.
Reason 1 – Control
This one is the reason that made me start to think about whether dividend reinvestment plans (DRPs) are good, bad, or both. Yes it was nice to be able to sit back and completely forget about the shares and just let them grow by themselves, but that is not what I wanted. I found myself eagerly checking how many new shares I received each half. Checking how close I got to another extra share if the dividend had been just a little bit larger. Given I was already putting that much effort into it, what was the benefit of the DRP? I could just buy the shares myself! Or more importantly I could buy different shares; or buy them at just the right time (which is always yesterday or tomorrow); or buy other goods/services; or just keep the cash. I wanted this control, but didn’t know specifically why I wanted this control for the longest time. I had not yet found a reason that motivated me enough to put in the effort to stop the DRPs.
In years gone past the main stumbling block to obtaining this control was brokerage. The cost of buying small amounts of shares (specifically the brokerage to capital ratio) has to be weighed up against the control you gain. As we were previously putting most of our money into our 80%+ deposit and then the mortgage repayments, I would have been purchasing only a few shares. Paying $15 brokerage for under a hundred dollars of shares was a ratio I could not justify. This is the really good argument for a DRP! It allows a very small number of shares to be purchased (sometimes we only received 1 or 2 shares) without having to pay brokerage. For low cost buyers like me, the brokerage is around $15 whether you buy $90 or $9,000 worth of shares.
Fast forward to today and times have changed. We have now paid off our house, so I am now in a position where I can (and want to) put extra money behind those dividends to help grow my investments faster. So the cost of brokerage is no longer a limiting factor. But I still needed that “something extra” to tip the scales and make me stop the DRPs.
Reason 2 – Easier and Faster Balancing
That “something extra” – this second reason – is what eventually tipped those scales. That scale tipping moment happened when I drew up a breakdown of assets, and finally had a concrete picture of my asset allocation and share diversification. The picture was not as nice as I wanted. The fastest way to fix my share diversification problem was to combine my new capital with the power of my dividends. I had found that something extra, it was easier and faster rebalancing.
I mentioned above that the relative cost of brokerage for very small purchases was too high, and how a DRP can help bypass that problem. However, when it comes time to try and balance (or rebalance) your portfolio, you either have to deploy more capital, or sell some shares and use the proceeds to buy others. Without more/enough capital, that means you have two lots of brokerage – twice the price – for what may be a small adjustment. Taking the dividends as real cash allows me to allocate it where I want to. If I believe there is an opportunity or an imbalance, I can fix it and fix it faster. More importantly for me is that I can fix the imbalance without having to sell a single share. That is the goal behind this decision – to not ever have to sell a share to rebalance the portfolio. Of course if one of the companies I own absolutely skyrockets I may have to break that goal, but I will also have made a large financial gain! A sacrifice I am willing to make 🙂
Don’t get me wrong, I am a huge fan of DRPs. I had been using them for over ten years before stopping, and there are a few cases where I did not stop them. Most have one thing in common that I believe currently outweighs the control and balancing arguments above: a share price discount. Some DRPs allow you to receive the shares you get from your dividends at a discount to market. Yes you still give up timing but, at risk of over quoting this, “it’s time in the market rather than timing the market”. I suck at timing! I bought some shares on Thursday only to watch them lose value on Friday, Saturday, and Sunday. So I will take a guaranteed price discount over my (in)ability to get the timing right any day of the year.
The second area where I kept my DRP going was when there is already a balance that I want to maintain. I am talking about listed investment companies, managed funds, and index funds. While some of these (especially in Australia) may not have the best diversification, they are still balanced or managed in some way that I am currently happy to maintain.
So now you know why the graph on my 2016 Q1 dividend update has that large spike in it. Do you utilise a DRP for your shares?