Thursday, September 20, 2012

Reinvest dividends, a strategy that could be wise or dumb?

The concept of dividend reinvestment sounds good.  Reinvest your dividends and reduce your cost basis.  It costs you nothing. Think about how cheap it is now that brokers let you do it.  No commissions, no dealing with the transfer agent at the company.

If you do not need the income from your portfolio of dividend machines, and you want to build your retirement portfolio without even trying, you can do it by reinvesting dividends.  By the time you retire, you just turn on the income spigot.   I have seen it work time and time again. 

However, dividend reinvesting can be a pain in the “you know where.”  You can end up with fractional shares that are hard or expensive to sell.  Therefore, you should use a reinvesting dividend strategy with companies that are truly long term holdings.  I think of long term as a decade or more.

A quality dividend income portfolio will have some stocks at their highs and some at their lows.  If all of them meet our minimal criteria, you should reinvest your dividends only when the stock price is low.  Stop reinvesting when the stock price is high. Savvy income investors should not pay premiums for their equities. 

I execute my dividend reinvestments based on these statistics:

            Is the stock trading at or near the 3-5 year low?
            Is the stock trading at or near the 3-5 year high?
            Stock Beta

When a company that meets the criteria of a dividend machine is trading at the 3-5 year low, I always reinvest dividends.  When one of my dividend machines is trading at a 3-5 year high, I stop dividend reinvesting.  When a company is in between, I look at the beta.   If the beta is high, I do not reinvest dividends because I may want to move into and out of the company with facility. If the beta is low, I decide if I can live with this stock for more than a decade.  More than decade equals dividend reinvestment, less than a decade and I cash the checks!

The morale here is to work your portfolio for every opportunity to reap income success.

Very Truly Yours,

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