Reinvest dividends or keep taking for cash flow

[scrabbler1]

Except for one sale when I used spec-ID, I have always used FIFO for my sales. However, Fido has always shown me cost basis using average-cost instead of FIFO.

 

[marko]

We live almost exclusively on dividends.

My only concern about reinvesting excess dividends right now is that between Covid and a general slowdown, I worry that dividends might be cut. I would reinvest but want to keep a cushion in case things change. Regardless, its easily rectified by selling shares if need be.

 

[Lawrencewendall]

Check with your broker. Some stocks offer discounts by reinvesting dividends, giving immediate savings. I have one that buys them at NAV (~$9.75) while market price is ~$13.50. If I took cash dividends and later decided to buy back in, I would be paying a premium instead of getting a discount.

 

[tenant13]

+1. We always reinvested dividends when we were working, but since retiring we take all our dividends since they're taxed anyway - it's our only income source until we reach SS age (no pensions, annuities or the like). However, if we didn't need the dividends for spending, I'd reinvest regardless of market outlook. FWIW

That's been my strategy.

 

[Montecfo]

Agreed, but I would not want to set this up as an automatic reinvestment. By picking/choosing when/where you reinvest, you can avoid wash sale (minor) complications.

-ERD50

This is such a good point. Reinvesting divs need not be in the stocks paying them. Instead find a good buy in the market today.

Get a better value and avoid wash sale issues.

 

[Sunset]

I'd continue to take the dividends.

Hopefully you have bought some I-bonds with the excess cash.

In the same manner, you can just pick a stock/ETF you like and buy some of that if you have too much $$$ lying around.

Or take a trip before you are too old to travel..

 

[target2019]

Thanks everyone for the replies. I really appreciate it. I think I we reinvest now and I can also revisit my decision on a yearly basis.

As the current market sinks that is a strategy that works. So long as you have sufficient cash across your portfolio legs it works to reduce cash flow within your needs.

 

[I am He]

Rather than straight reinvestment, you might want to choose where to reinvest the div's; rebalance some accounts that have gone too far in any direction.

 

[PoF]

Money is fungible, and I don't think the market conditions should dictate what you do with dividends.

My preferred approach is to have auto-reinvestment turned off. This also helps in the event that you can do some tax loss harvesting, you will avoid accidental wash sales.

If you have no use for the dividend money and other money that may be accumulating in a money market or checking account, manually (re)invest in whatever you like.

Cheers!
-PoF

 

[ERhoosier]

Reinvestment of dividends made much more sense years ago in the era of high broker fees. IMHO-To DR or not is now largely a moot point except for two issues-

1. Personal discipline. DRIP prevent folks taking 100% cash dividends may let it sit rather than invest it. OTOH- Folks blindly reinvesting 100% dividends may build overly concentrated positions over time, particularly with high yielding stocks/funds. It takes investing discipline to actively maintain one's chosen AA.

2. Stocks/funds with DRIP discounts can boost returns (reinvested dividends buying more shares at below market share price).

Personally I take all dividends in cash these days and invest them in line with my target AA. (I currently have no equities offering DRIP discount programs but have used them in the past).

 

[Chuckanut]

I've been taking dividends as cash and reinvesting capital gains.

Given the latest drop in the overall market index, I am thinking I might use some of the dividend cash to buy a few extra shares. But, so far the dip is not quite enough to really tempt me. Wake me up if the total stock market index funds are hit with a 20% loss from the previous high.

 

[Sunset]

I've been taking dividends as cash and reinvesting capital gains.

Given the latest drop in the overall market index, I am thinking I might use some of the dividend cash to buy a few extra shares. But, so far the dip is not quite enough to really tempt me. Wake me up if the total stock market index funds are hit with a 20% loss from the previous high.

QQQ is down about 24%

 

[mathjak107]

Reinvesting dividends is buying low in a down market. Sounds good to me!

Actually it isn’t , it’s a wash


Say you have 100 dollars in a stock paying a 10% dividend .

the stock goes ex div and a mandatory drop by the same amount has to happen before the stock trades , no different then a fund .


so you have 90 dollars left working for you for markets to work on and 10 dollars in hand .

great news , your stock doubled , they cured covid so you have 180 dollars invested .and 10 dollars in hand ...

so that is 190 dollars .


if instead of keeping the 10 dollars you reinvest it , you have more shares at a lower price which now equals the 100 dollars you had before the stock went ex div . if it doubles you have 200 dollars

if the stock didnt payout and still had the same 100 and it doubled you have the same 200 dollars .


there is no difference , its a wash,


here is at&t as an example

https://finance.yahoo.com/quote/T/history



on 4/12 it closed at 19.56 ... it paid a .278 cent dividend , the price was adjusted down to 19.28 ....

the stock opened at 19.12 which is the dividend less market action over night or after hours once it went ex div . .

so if you had 1000 shares you closed on 4/12 at 19,560 dollars .

the price was adjusted down to 19,280 dollars and you had the dividend in hand .

if instead of falling , markets doubled your stock price , you would have 38,560.00

if you reinvested you would have approx 39,120


if the stock never went ex div you would have no adjustment and the same 39,120 if it doubled.

of course while funds reinvest over night stocks usually lag so your reinvested price may vary a bit but the mechanics are the same .... for the most part its a wash reinvesting , you are only penalized if you dont reinvest so you have the same amount compounding for you.


anyone can create the same exact cash flow from non div payers or a portfolio..


Think of the same situation above .

You have 1000 shares at a 100 a share .so you have 100k working for you for markets to act on .

A whopping 50% dividend is payed .


So you reinvest and now buy way more shares at 50 a share

So you now have 2000 shares at 50 a share …

That is the same 100k compounding for you that you had before threy dividend .

If the stock never paid out you had the same 100k .

In both cases if stocks double you have 200k.

If you didn’t reinvest you would only have 50k for markets to work on .

It is a hard concept for many to understand….

Only adding new money can increase your value , not having Them hand you back a piece of your investment value and you give it back