I was thinking about what I have left out with regards to my investing style and it hit me: I have not discussed whether or not I reinvest dividends or I "bank" the money and use it all at once to purchase another stock that I feel is undervalued.
With that being said, I currently DRIP all of my dividends back into the same company that pays the dividend. So for instance, when Verizon goes Ex-Dividend tomorrow, I will receive $67.35 in dividends. That income will then purchase 1.43 shares of VZ at the current price of $47.04. I will then control 123.89 shares of this massive company which will generate $68.14 in dividends and that my friends is compounding at work!
There are a few reasons I DRIP all of my investments:
1. When I first started this journey I felt I was not making enough in dividends to be able to "Bank" them. I felt I was not able make additional purchases with the proceeds at a quick enough pace to make it worth it.
2. When I first started, I was a single guy in my early 20's and was not able to invest as heavily as I am now. I started my journey with adding roughly $250 per month into my brokerage account so I thought why not just let the dividends reinvest and that way I can see the results. It was mentally rewarding to see the money I was putting to work was then being put to work over and over again even it it was only in fractional shares.
3. When I first started, I continued to read articles that said retail investors are poor investors because they jump from investment to investment and notoriously do a bad job at "timing the market." With dividend reinvestment, I was prohibiting myself from making poor investment decisions with the extra dividend payments I had.
So as you can see, I started all of those reasons with "When I first started" and that has changed! I no longer consider myself a "retail" investor. I believe I have acquired enough knowledge to call myself "Average" and on my scale, that is better than retail! I now look at fundamentals, I look at macro forces, I look at chart technicals and overall I believe I have progressed to a stage that is better than "retail."
With that being said, the reasons for DRIP investing have changed and as such, I think I might change my ways.
1. I am starting to generate substantial dividends month after month at around $250. I like to invest about $2,000 per purchase right now so that means I am able to purchase one extra company per year! With this total increase month after month, it is only a matter of time before I am able to make multiple purchases using just dividends.
2. Now, I am no longer single. I have a beautiful wife who appreciates the effort I have put in to solidifying a more prosperous future for us and she has embraced the dividend investing way of life. With that being said, our combined income is much higher than our expenses which is being put to work buying dividend stocks. She's even purchased one of her own, Proctor & Gamble!
3. Like I eluded to above, I don't consider myself a "retail" investor anymore. I know I'm not an investment broker, but I'm no longer a newbie either.
In conclusion, this post has laid out the reasons why I reinvest dividends and why I am considering changing that approach. It is my thought process right now to continue to reinvest dividends until I have annual income of around $10,000 in dividends. At that point, I think I could pick undervalued companies instead of reinvesting them at potentially higher valuations. I will also bring down the investment amount to around $1,250 per purchase therefore allowing me to buy 8 companies using my dividends throughout the year.
Stay tuned to see if the plan comes to fruition! The American Dividend Dream in full swing!
What do you think? Good idea, bad idea? How do you invest?