I committed to dividend investing as my primary retirement strategy in March of 2014. I planned on participating in Dividend Reinvestment Plans or DRIPs with every stock in my Investment Hunting portfolio. Over the past few months my stance on the concept of setting up DRIPs into perpetuity has changed. Don’t misunderstand what I am saying. I believe DRIP investing is a fantastic way to build wealth, increase dividend revenue streams and take advantage of dollar cost averaging. However, I now stand behind the idea of what I call intentional DRIP Investing.
What is DRIP Investing
If you are a dividend focused investor I am sure you are well aware of the DRIPs; feel free to skip this section. If you are new to investing, DRIP investing is a concept that should be of interest to you. There are many online resources where you can learn more. I suggest starting at The DRIP Investor.
DRIP investing defined in a sentence or two – Receiving cash dividends for stock you own and immediately reinvesting the dividend back into the same stock. DRIPs are free and allow an investor to purchase fractional shares. DRIPs can be setup with most online brokers or through services who broker directly with companies.
Intentional DRIP Investing
I’ve coined the concept Intentional DRIP. As a value focused dividend investor, I am 100% intentional with every investment decision I make. I should be intentional about my DRIP strategy and not just pile fractional shares on top of existing stock positions.
My DRIP Strategy Today
If my DRIP strategy today were an animal, it would be a Lamb. Lamb defined – A Sheep that is less than one-year old. My portfolio is in the Lamb phase, just getting starting out and learning as it grows. The value today of the eligible DRIP portion of my Investment Hunting Portfolio is approximately $27,000. I DRIP every stock I own; the set it and forget it model. I believe this is the correct strategy to have with a portfolio that is not sizable enough to churn out large dividends on a monthly or quarterly basis. For example, right now I earn between $40 and $100 a month in dividends. This dollar amount is not high enough for me to buy enough selected shares because I will incur trading fess. I could choose to hold my dividend income and invest quarterly, but even I waited and invested quarterly my dividend income is too low to justify an intentional DRIP strategy.
The Lamb strategy works for me now, but is in my opinion a foolish way to continue once my monthly dividend income reaches a high enough point to warrant intentional investing. Today, I automatically DRIP every stock, even those that are in my opinion over-valued. This strategy forces me to ignore current price trends, in that I am buying regardless of price. This is a fantastic strategy when stocks are low but not so when stocks are high.
My DRIP Strategy Next Month
As mentioned in my previous article, titled “My Dividend Investor Dilemma,” I will be increasing the DRIP eligible portion of my investment portfolio by more than 400% in the next 30 days. By the end of March I will have over $130,000 invested in dividend paying stocks. I do not know what my monthly dividend income will be yet, but I do know this amount will be substantial enough to allow for an intentional DRIP strategy.
Intentional DRIP fits well with my 2015 goals statement, “I will add $50,000 in fresh capital to my retirement accounts this year.” Aside from my 401k and IRAs, this leaves $22,000 to come from savings. I plan to combine monthly dividends with a portion of savings and make at least one major stock purchase per month. Moving forward, as a rule when brokerage fees are involved, I will spend at least $1,000 on a transaction. If I do not have enough dividend income to satisfy this threshold, I will back-fill with my savings.
When to Automatically Versus Intentionally DRIP
This is a personal decision requiring analysis of an investors, goals, available capital and their stance on being a passive or active in monitoring their investments.
Speaking for myself, my number is $1,000 a month in average dividend income. Once I achieve $1,000 a month, I believe it is in my best interest to re-evaluate my existing portfolio and find an under-valued stock. By doing so, I am still a DRIP investor, I am Intentionally selecting the best opportunity available to me at time of purchase to allocate my DRIP money to.
I am sure there are some investors who will argue that I am wasting my money by paying a brokerage transaction fee, when I could simply activate DRIPs automatically for free through my broker. My counter argument is that I could do this but I would be in most cases be forced to reinvest my capital into the same stock from whom the dividend was paid. When making a high dollar amount purchase I am comfortable spending $9.99 to process a trade. In theory, by buying applying capital to the best opportunity each month, I will make far more money in the long run and offset any associated costs.
I believe in DRIP investing. I further believe that at some point a DGI investor is better served to intentionally DRIP invest versus automatically DRIP invest. To me, intentional DRIPs offers upside to investors who follow a buy and hold investing strategy. By Intentionally buying on dips and sector downturns, I am confident my portfolio will be larger in 30 years than it would be if I set everything on an automatic DRIP strategy.
Do you DRIP invest? What are your thoughts on automatic versus Intentional DRIP?