Why Dividend Reinvestment Plans Are Hurting Your Portfolio

Back in the summer of 2008, we purchased 25 shares of our very first dividend stock. That stock was Consolidated Edison (ED) and is one of the best dividend paying companies we own.

Since that one purchase over 8 years ago, we have have received $627.50 in dividends from that company.

At the time of our original purchase of Consolidated Edison, we signed up for DRiP (Dividend Reinvestment Plan). That meant every time we got a dividend payment, it was reinvested automatically into partial shares of ED.

The $627.50 has been used to purchase 11.675 additional shares of Consolidated Edison stock to date.

Based on the current yield of the company, those 11+ extra shares have increased our annual dividend income by $31.29.

All of these extra shares (11+) have been accumulated using DRiP through our Fidelity brokerage account.

We now earn an astounding 10.06% yield on cost from our shares of Consolidated Edison stock.

For the most part, using DRiP has allowed our portfolio to grow every time we receive a dividend. And in the case of Consolidated Edison, has given us a stock that provides a yield over 10%!

The Problem With Dividend Reinvestment Plans

While using dividend reinvestment plans has helped us build shares of Consolidated Edison and many other great companies – it doesn’t always make sense.

What I mean is that using DRiP isn’t always the best way to invest your dividends.

Overvalued Stocks

For example, several of the stocks in our portfolio are currently overvalued. This tends to change month to month, but no matter what the market is – there is always going to be a stock that is too pricey.

Does it make sense to reinvest your dividends back into at stock that is overvalued? In some cases it may, but most of the time it probably doesn’t.

I think reinvesting through DRiP was a solid plan 8 years ago when we were first starting out. It allowed us to slowing build up positions in some great companies.

However now, our investing style has changed – so DRiP is not always the best way to reinvest.

Reinvestment Fees

Another issue with some (not all) dividend reinvestment plans are the fees. The majority of dividend stocks we own do not charge fees or the broker covers the cost.

However, there are a few that do charge fees and sometimes it is a lot. Take for example our shares of Verizon stock (VZ).

In the 3 dividends we have received so far this year, we have paid $1.03 each time in fees to reinvest. With dividends under $20, that is a sizeable fee to pay just to reinvest.

  • February – $13.14 in dividends ($1.03 in fees) = 7.84% of investment
  • May – $14.83 in dividends ($1.03 in fees) = 6.95% of investment
  • August – $16.03 in dividends ($1.03 in fees) = 6.43% of investment

Note – At the time of this writing, we have not received our November dividend.

Even though the VZ fees have remained static ($1.03) this year, I am no longer willing to pay them. I should have never allowed myself to pay them in the first place … but I was lazy about doing anything about it.

We also pay fees on reinvesting shares of Lockheed Martin (LMT) stock. These fees are about 5% – which is a little less than VZ but still not acceptable.

Both of our VZ and LMT shares are held through Computershare. We also hold shares of Clorox (CLX) and Exxon Mobile (XOM) that do not charge any fees at this time.

So each stock is different depending on the company and where your shares are held.

The bottom line is that – We don’t like paying fees and neither should you.

Say No to Fees and Over Valued Stocks

We plan to suspend our dividend reinvestment plans shortly for both Verizon and Lockheed Martin shares in our portfolio.

I want to stretch every investment dollar we have, and paying over 5% in fees is just not acceptable.

In addition, we are going back through our DRiP stocks to see about suspending others. Instead of paying a premium for partial shares of stock, we may let our dividend income build up and invest in stocks that are fairly valued.

By leveraging zero cost brokers, this has become an easy alternative to DRiP for dividend investors.

Zero Commission Brokers

Two of my favorite stock brokers that we use to build our portfolio are LOYAL3 and Robinhood. Both have their advantages and disadvantages as brokers. But what I love about each is that we can buy shares of stock with $0 commission.

By offering $0 commission trades, there are fewer services available to customers of each broker. One service currently not offered by LOYAL3 or Robinhood is dividend reinvestment plans.

In the past, I had argued that this was a disadvantage to investors not having access to dividend reinvestment plans.

I would argue now that DRiP’s, for the most part, are highly overrated.

I have learned to change our investing habits by using both platforms. We still invest 100% of our dividend income. It is just invested differently now.

Instead of automatically reinvesting dividends in the same stock, we invest the money in companies that are fairly priced. This helps us get the best possible value for our money.

Conclusion

Nobody wants to pay top dollar when they buy something. That is how I feel about investing.

Why pay over 5% on a stock trade, just to reinvest dividend payments back into partial shares of stock?

That is what some dividend reinvestment plans are currently charging us.

While there is some value in using DRiP’s, I think there are often better tools to use (i.e. zero commission brokers) to build a dividend income portfolio.

Do you still DRiP some of your investments? Are you getting charged high fees for any of your DRiP stocks?

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