Ask Colin

What is your view on company dividend reinvestment schemes?

I don't use dividend reinvestment plans. My reasoning is:

 

1. They greatly complicate the accounting - if you have ever administered a deceased estate that had long term holding with a dividend reinvestment plan, you would have had experience with the problem. Of course, if you have kept excellent records, it will not be as big a problem. Most people do not keep the necessary detailed records over decades and there is always the problem of a period of illness/incapacity leading to death when things slip.

 

2. More importantly, the discount in acquisition through the reinvestment plan can be erased in transaction costs if something causes you to sell a shareholding between the ex-dividend date and the payment date, leaving you with a small parcel of shares. Of course, if you are a long-term passive investor in sound stocks, this may be a very minor problem. However, my approach is more active in managing the portfolio to maximise returns.

 

3. I hate paperwork and like to keep things simple. Banking the dividends by direct credit and then investing them in stocks is how I keep it simple. The trade-off is maybe lower return against a better lifestyle. Investing is about creating freedom in our life and trying to grind out every last dollar can be make us a little richer financially but poorer in quality of life. Each of us finds their own balance.

 

I hope these thoughts help your decision-making.

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