Selective v Automatic Dividend Reinvestment

Originally published: September 8th, 2015

I have chosen to selectively rather than automatically reinvest dividends paid by my various investments. I had long had issue with automatic reinvestment because you don’t have control over the price you pay when the dividends get reinvested. Jason Fieber at has articulated this position extremely well, and frankly I owe him the credit for finally making up my mind on this topic.

To summarize the argument:

As long as one is regularly deploying capital, collecting dividends as cash and adding them to the pool of regularly deployed capital lowers the real commission costs paid and gives the investor the flexibility to reinvest those dividends in opportunities that maximize value and diversity at the time of reinvestment.

Automatic reinvestment takes away the flexibility of how that capital is deployed. It does force dollar cost averaging (DCA) onto the investor, and takes the headache out of continual research, which many people would probably see as an advantage.

Constant small reinvestments are hard to keep track of in terms of cost basis.

You can read Jason’s article on the subject here:

With recently passed legislation about your broker having to track and report cost basis for you, the whole argument about keeping track of a lot of little transactions is basically moot. Add to that the fact that a fundamental tenant of dividend growth investing is that you don’t really sell stocks very often, and I just don’t see the point in including that argument in this discussion.

If an investor, such as me, is constantly trying to maximize the value of newly deployed capital, the continual research headache argument doesn’t really hold either, since the research is part and parcel to the strategy.

I have yet to see a definitive study that shows dollar cost averaging is any kind of an advantage (i.e. helps an investor outperform the market.) DCA is another one of the commandments in the Church of Buy and Hold that I simply do not accept. It may provide a psychological advantage, forcing you to invest with a disciplined approach regardless of current market conditions. That’s all fine and good but it really just circles back to the headache of continual research argument, which is dumb if you’ve already accepted that you kind of like the research rather than consider it a headache. DCA is a good way to ensure your investment at least matches the market, whatever that means. No thanks…the market is crazy, why would you want to match it?

So it’s a clear cut decision for me to go with selective rather than automatic reinvestment. But…

This brings us around to another commandment of the Church of Buy and that I would like to address: it’s okay to admit that you’re trying to time the market. Blasphemy I know. But let’s evaluate the principal argument here: the advantage of selective dividend reinvestment is the opportunity to get more value out of the dividends. Blindly reinvesting the dividends in their parent stock on dividend day at whatever crazy price Mr. Market has set doesn’t maximize the value. Pooling the dividends with other capital and purchasing a comparatively more undervalued stock may or may not maximize the value, but presumably it increases it substantially.

Say what you want, this is all just a fancy way of saying we’re trying to time the market. In fact the very concept that a stock could be “undervalued” suggests there is a temporary market inefficiency that the value investor wants to exploit before it goes away.

Like most good commandments, the commandment that says “thou can’t time the market, so thou shalt not try to” is founded in really, really good advice. Anticipating peaks and valleys in a stock price’s random walk is impossible, and trying to capture only the upswings with constant portfolio turnover is a great way pay a lot of fees to your broker.

But much like the Judeo-Christian faith only selectively adheres to (and often completely ignores) their commandment about killing people, the Church of Buy and Hold will go on and on about the merits of “value investing” while conveniently ignoring the fact that the whole goal of that strategy is effectively trying to time the market, albeit principally on the buy-side only.Am I trying to time the market? Hell yes I am. If I can get the same stock next week for 5% less than I can get it today, I will wait until next week thank you very much! Will I get it right every time? Absolutely not. But I do believe I have a way to tip the odds in my favor, so as long as I have confidence in my ongoing, diligent research and valuation analysis, I am absolutely going to try to time the market by only buying stocks at or below their true value, and my dividend reinvestment strategy is consistent with that.

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