When it comes to reinvesting dividends, there are primarily two strategies to consider, each with its own set of advantages and drawbacks. The first and most widely used method is known as a Dividend Reinvestment Plan (DRIP). A DRIP automatically channels your cash dividends back into the stock that generated them, effortlessly acquiring additional shares for your portfolio. While convenient, the downside of a DRIP lies in the potential imbalance it may introduce to your portfolio, as you cannot direct dividends to the securities with the greatest decrease in current value.
An alternative approach is opting to receive dividends in cash, presenting several notable benefits. Foremost among them is the ability to maintain portfolio balance by reinvesting the cash into stocks with lower current values. This method grants you the freedom to choose when, where, and how much cash to reinvest, providing flexibility in portfolio management. Moreover, it allows you to capitalize on market volatility, strategically investing based on your preferences. Although this approach demands more active engagement in the reinvestment process, the advantages far outweigh the sole disadvantage.
If you decide to receive dividends in cash, consider a few key points. Maintaining a balanced portfolio is crucial for risk management, achieved by reinvesting cash into stocks with the least current value. The frequency of reinvesting cash depends on your availability; those with ample time may choose to reinvest more frequently, while busier individuals can opt for longer intervals. For large portfolios with substantial dividend streams, daily reinvestment could be considered to leverage the benefits of dollar-cost averaging. One final thought on managing your portfolio. At Fly High Investing we believe you should manage your portfolio, don’t let the portfolio manage you. After all, sooner or later your passive dividend income stream is going to be so large that it won’t really matter what method you choose. Your biggest problem is going to be how to spend all that money flooding into your bank account.