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,
TheMoneyMadam
