Over the years I have read articles which ask "Which is better? Automatic dividend reinvestment or cash?"
I think both stategies are dependent on your personal preference and financial requirements. What might be an appropriate course of action for one investor may not be wise for another. Furthermore, one strategy may be appropriate during one stage of your life but not in another.
Some companies have a dividend reinvestment program (DRIP) administered by CST Trust Company or Computershare Investor Services. If your shares are enrolled in these DRIPs, 100% of your dividends can be automatically reinvested since the accounts can hold fractional shares.
Some companies in which we hold shares do not have a DRIP. The bank with whom we hold our self-directed investment accounts, however, offers a service wherein it will reinvest our dividends to acquire additional company shares. The limitation of this service is that fractional shares are not acquired, and therefore, there is always a small cash component that remains in the account.
We held some of our BCE Inc. (TSX: BCE) shares with CST Trust Company up until 1.5 years ago. Since I wanted to simplify my oversight of our portfolio, I transferred these BCE shares to a self-directed account held with my former employer, a major Canadian financial institution. As a result of the service described above, we continued to benefit from the "hands-free" approach to which we had become accustomed vis-a-vis our BCE investment.
We Automatically Reinvest the Dividends
Several years ago we decided to implement the automatic dividend reinvestment strategy across all our self-directed investments accounts. Our rationale for doing so was that we:
- were confident the companies in which had invested would be in existence well into the future.
- wanted to accumulate as many shares as possible without having to repeatedly make investment decisions.
- preferred to have our money actively deployed as opposed to possibly sitting in cash.
- endeavor to minimize investment related expenses; the automatic reinvestment of our dividends enables us to avoid trading costs.
- took my emotions out of the equation.
An Example of the Impact of Automatically Reinvesting Dividends
In 2006, we established a small position in Canadian Imperial Bank of Commerce (TSX: CM). In October 2006 521 shares generated $364.70 in dividends. We subsequently made no further purchases other than the automatic reinvestment of the quarterly dividends.
On January 27, 2017, we owned 823 CM shares which generated $1020.52 in dividends. Altogether we have received $26,528.66 in dividends since establishing a position in CM and there has been absolutely no manual intervention on our part!
As you can see, one decision made roughly 10 years ago means we now receive an annual dividend income stream of over $4000.
Dividends from American Deposit Receipts (ADRs)
The companies in which we own American Deposit Receipts (ADRs) are an exception since the automatic reinvestment of dividends is not available for ADRs. Dividneds from these holdings are received in cash. I merely accumulate these cash dividends until such time as I indentify attractive investment opportunities.
We opted to go with the automatic dividend reinvestment strategy. You, however, may prefer to receive your dividends in cash because you:
- feel you already have a “full” position in the company;
- personal circumstances are such that you need the cash dividends to cover expenses.
Furthermore, one method of receiving your dividends may be appropriate for one stage of life but not another. An example might be when you transition from full-time employment to retirement and you are no longer receiving a steady paycheque.
In a nutshell, I don't think one method of managing the receipt of your dividends is preferable to the other.