Ask Colin

Should I use a company dividend reinvestment scheme for my investments?

The detailed question was:

Having started investing, I have started to receive information from the companies, introducing their dividend reinvestment plan. I don't know whether I should convert the dividend into shares. What are the things I have to be careful about/have to check? What do you suggest?

I think that the answer to this depends on your objectives.

If you are a long term investor, then it is quite clear that you would tend to reinvest dividends unless there was a compelling reason not to - such as if you already had all the exposure you want to have to a company. Long term investing is driven by compounding returns and so it makes sense in broad terms always to reinvest income.

If you are a short term trader, then it is quite clear that you would tend to simply ignore these schemes. They are of no relevance to what you are doing, which is buying and selling shares. They would add great complexity to the trading process and for little reward in the time frame involved.

In between these two extremes there is a large area where either course may be relevant in the particular circumstances. If you are looking to expand your holdings in a stock, then it can be a cost-effective way to do so.