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Thu. Apr. 3, 2008

Turbo Charge Your Portfolio With Reinvested Dividends *

It is well-documented that a significant portion of the historical equity returns are a result of reinvested dividends. In Triumph of the Optimists: 101 Years of Global Investment Returns (2002), the authors looked at equity returns from capital gains and dividends from 1900 to 2000. They determined that performance in any given year was driven by capital appreciation, but long-term returns were largely the result of reinvested dividends. Looking at 101 years of data in the U.S. and U.K., they found that a market-oriented portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains.

When most people hear the phrase dividend reinvestment, they will often associate it with dividend reinvestment plans (DRIPs). Many companies offer DRIPs through their transfer agent. Instead of sending dividend checks to shareholders enrolled in the company’s DRIP, the company reinvests those dividends by purchasing additional shares (or fractional shares) in the shareholder’s name. Most plans will reinvest a shareholder’s dividends without a fee or commission. Some brokerages offer similar plans.

It is important to note that you can reinvest dividends without participating in a formal DRIP plan. Personally I have chosen not to participate in a formal DRIP plan. I prefer the flexibility of determining where my dividends are invested. I add them to my normal monthly investment, thus I do not incur any additional commissions.

Do you reinvest dividends through a formal program, independently or not at all?

Note: Be sure to read the comments for a lively discussion on how to invest dividends earned without incurring an additional commission.

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14 Responses to “Turbo Charge Your Portfolio With Reinvested Dividends *”

  1. MG says:

    D4L, I’m not sure what you meant by the commission comment. I am like you though, I have a few DRIPS, but with the the majority of my dividends and distributions I just let them build up with my broker and use them to fund purchases that I would have otherwise made with saved money.

  2. dividend growth says:

    I don’t use drips. I do reinvest dividends when I receive them though. But I might re-invest the dividends by buying a different company in order to maintain equal weights in my portfolio.

  3. Dividend Tree says:

    D4L: I do not participate in DRIPs. However, I do reinvest dividends through my brokerage account (no commission, fractrional shares possible, and have flexibility to change with few clicks). Flexibility helps rebalancing.

  4. Jason says:

    I’d like to have a system that doesn’t involve a commission, without using a DRIP.

    I have a SCOTTRADE Roth IRA and an SCOTTRADE Individual account and last time I asked, they didn’t support an automatic reinvestment system.

    Can anyone recommend an online broker that does?

  5. Guppy says:

    How does one do this? I do the same as “dividend tree” and reinvest it in the same stocks with my brokerage firm. I am not even sure I have another option. I should talk with my brokerage firm.

  6. Dividends4Life says:

    All: Sorry, I was not very clear in how I reinvest my dividends with no additional commissions.

    First the operative word is “additional”. Let’s say hypothetically I invest $3,000/month and the dividends I earned during the month were $600. What I do is add the $600 to the $3,000 and invest it in where my asset allocation needs are. Thus I only spend $7 in commissions on the full $3,600, which is what I would have spent on the $3,000. Thus, no “additional” commission. The same would be true if I normally used the $3,000 to buy 3 different securities each month. Instead of investing $1,000 in each of the securities, I would invest $1,200 in each, again my commission is the same as it would have been without the dividends ($21 in this example). The only way I pay more commissions is if I independently invest the $600 in addition to what I normally would have done, thus increasing my commission by $7.00.

    The above works for a taxable account that is funded each month. For my Roth IRA, I let the dividends accumulate to the minimum needed for an additional investment in a selected mutual fund, usually $50 to $100 for an IRA account. Once it reaches that level I invest in the mutual fund. Then once I add $1,100 to the mutual fund I withdraw $1,000 and purchase another income investment and start the process over.

    Again, sorry for the confusion.

    Best Wishes,
    D4L

  7. Jason says:

    What are tax implications for dividends earned in an Individual Account? Are they taxed at 15% even if they’re reinvested?

    Thanks guys!

  8. MG says:

    that’s what I thought you meant..thanks for explaining

  9. dividend growth says:

    Jason,

    Yes, dividends are taxed in US at a rate of up to 15% depending on your annual income even if you reinvest them.

  10. Dividends4Life says:

    Jason: I am not a tax person and I only have experience with a Roth IRA. In my Roth IRA domestic (U.S.) dividends are for the most part never taxed. There are some special rules for certain tax-advantaged dividends (REITs, MLPs, etc.) where they may be taxable at certain levels. But for “normal” dividends you receive from corporations, they are never taxed.

    Best Wishes,
    D4L

  11. Jason says:

    Thanks for the reponse Dividends4Life. I’m pretty new to this so I will try and keep my higher yielding stocks to my Roth IRA!

  12. Monevator says:

    Can I just say thank you for writing “in the US” around some of your comments. I appreciate you can’t do it all the time, or even more than some of the time – it’d get dull – but still it’s really refreshing when a US blogger notes there is life beyond the US’ shores. (I understand the US population dwarfs old England and so the temptation to just write for the US must be high).

    UK dividend investors might want to Google “Barclays Capital Equity Gilt Study” to find similar research that proves the importance of dividends in the UK.

  13. Cory says:

    Jason (& others who might have looked at the same issues):

    I started with Scottrade in an IRA and regular account, but a few years back switched to Schwab, which has a “toggle” that you can check to reinvest or not at any time. It buys fractional shares. I have been very pleased. Schwab also has many of the good traits of Scottrade (low trading costs), although I find the website a bit more difficult to navigate in some respects. Good luck-

    Cory

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