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HistoricalPEGuy (62.64)

Don't Listen to the DRIP Fallacy

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June 03, 2012 – Comments (8)

Over and over again, I hear investment professionals quote the amazing power of DRIPs - Dividend Reinvestment Plans.

In these volitile periods, betting on companies with growth and divedend is a great strategy - but risk is all around us.  The best way to avoid risk (when interest rates are going nowhere) is to have cash on hand.  As the market continues to fall, betting on higher yielding stocks is a great investment - but don't rely on the performance of the stock.  Turn it into cash and build your reserves. 

Your key to success is being cash rich and ready to strike -- continued reinvestment is a higher risk strategy.  Turn yields into something you can actually use... CASH!

Feedback welcomed!

--HPEGuy 

8 Comments – Post Your Own

#1) On June 03, 2012 at 11:47 AM, HarryCaraysGhost (99.71) wrote:

Wait a minute somethings wrong here.

How long are you just sitting on cash and where do you put said cash. Maybe you can time Mr Market perfectly but most of us can't.

The point of Drips is to dollar cost average over a long time period. So as long as the yeilds safe no worries mate.

Now if your talking about trades, thats a different story. You would'nt set up a drip to begin with if your not long on said equity.

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#2) On June 03, 2012 at 1:53 PM, Option1307 (29.92) wrote:

I suggest "mannual DRIP's". Save up those dividends and reinvest whenever there is a 10% drop in the market, like say now...

DRIP's are a great system for most Fools but you can improve the system greatly with minimal effort by simply applying a touch of effort.

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#3) On June 04, 2012 at 11:12 AM, Valyooo (99.57) wrote:

I don't like DRIPS.  I like dollar cost averaging, but I prefer to do it by just adding new cash to my account.

The point of dividend stocks over growth stocks is to generate income and have more of a safety net...a DRIP turns a dividend stock into a non-dividend stock.

I like what option said about the manual drip/

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#4) On June 08, 2012 at 2:47 PM, chk999 (99.98) wrote:

The question is how much effort is an investor actually going to put in? To deploy cash effectively you have to keep track of a lot of things and this involves hours per week of effort.

The average investor wants to put a couple of hours a year into it. For them, index funds and DRIPs work better than trying to trade. 

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#5) On June 08, 2012 at 3:31 PM, ntg187 (86.65) wrote:

A DRIP is only a wise choice in a bull market.  As long as your share prices continue to decline a DRIP will dollar cost average for you.  Anyone with money in the market should atleast know the ex-dividend date for any dividend play they invest in.  The 'average' investor who puts in a couple of hours a year isnt investing... they are building a 401k on the open market without any of the tax breaks lol!!!!  In an age where everyone has a smart phone, how hard is it check on your portfolio once a week?? hell lol how about once a day?  You might as well just go down to the bank and sign up for a CD... that'll take you a couple of hour a year and garauntee you a positive ROI.

 The dividend plays I have in my portfolio are there only to offset and dollar cost average my high risk plays.  Its kind of a garuntee that if the roulette table doesnt stop at black i still get paid anyway lol.

I did however open an account in my sons name and enroll all of his holdings into DRIPS which I monitor on a quarterly basis for re-evaluation purposes.  That portfolio is my version of the 529 for college tuition though, so it has a long life ahead of it.

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#6) On June 08, 2012 at 3:32 PM, ntg187 (86.65) wrote:

In the above comment I clearly meant 'bear' market and not bull.  Just wanted to self-correct.

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#7) On June 08, 2012 at 7:57 PM, HarryCaraysGhost (99.71) wrote:

Option1307

I forgot to mention that with a drip you have the option to add to your position anytime you want. As low as $50 in many cases. So you could manually Drip, but still leave the dividend alone to grow.

The commissions are neglible, so why would'nt you roll over the dividend. Lets say you had a stock that paid you $10 a qtr in divis would you want the ten beans or let it ride to compound?

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#8) On June 10, 2012 at 1:14 AM, HistoricalPEGuy (62.64) wrote:

Thanks to all for the great comments!  I will admit my blog was a bit one-sided, but to make a key point -- building a cash reserve is paramount in times like these.  High Quality Dividend Stocks represent a great way to generate cash, why re-invest when things are so uncertain?

DRIPS are not evil, in fact they can be huge money makers - but that's when things are going well and downside risk is small.  In today's market, downside risk looms at every turn - so take a moment and ask yourself - would you rather have cash to pounce when the market is totally oversold or would you rather keep re-investing because you think the stock will only go up from here?

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