Whether you're investing in mutual funds or individual stocks, you want to do your best to minimize fees. They may seem small individually, but in bunches, and over time, they can really take a bite out of your returns. For that reason, financial advisors have long recommended using dividend reinvestment plans, which steadily plow your quarterly payouts into more shares of the companies that pay them, boosting your stake commission-free and hassle-free.
However, in light of recent moves by major brokerages to eliminate trading fees, is that strategy still the best choice? In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Ron Gross weigh in on other possible ways to get more out of your dividend payouts now.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 8, 2019.
Chris Hill: Question on Twitter from Rod in Albuquerque. Very timely question from Rod. "With trading conditions at zero, does Deip investing make sense anymore? Should we all just use our dividends to invest in our best idea at the moment?" Great question, obviously, in the wake of last week's news. Schwab, Ameritrade, E*Trade just saying, "It's free, everybody!"
Ron Gross: It's a consumer's world out there.
Hill: As someone who has had his money with Ameritrade for a long time, I was very happy to see them follow suit with Schwab. Drip investing, for those unfamiliar, dividend reinvestment plan investing. What do you think of Rod's question?
Gross: It's a good question. There's two kinds of Drips. One, the company itself offers it, the ability to reinvest the dividends they pay you into more stock.
Hill: You go right to the IR department of the company.
Gross: Exactly. That's commission-free. The other kind is offered by most, if not all, brokerages. You just click a box and they will automatically reinvest your dividends for you. That is also commission-free. Either way, you're able to add to the companies you already own. Hopefully they're your favorite companies. Slowly quarter by quarter, in little drips and drabs -- get it? Drips. [laughs] I didn't mean that. But, it's commission-free. That's great.
So, here's the question. Instead of doing that to get around the commissions -- it's a way of investing in companies without having to pay commissions -- in the new world we've just entered, where you can invest in any U.S.-listed company for no commissions the question Rod asks is, what about now? Maybe we should be taking those dividends in cash and reinvesting them into our new and favorite ideas. There's a lot of merit to what he says. I've always had this up and down opinion of this.
Professionally, when I used to manage funds, I always took the dividends in cash because of exactly what Rod says. I always wanted the cash available to redeploy into my favorite positions, whether they were new or even old. The small amount of commissions, I would have to pay if I did invest more money in stocks I already owned was not a reason not to do that.
However, personally, I always tell people, it's just so much easier to automatically reinvest your dividends. You start off with 20 shares of something, and you look 10 years later, and all of a sudden, you own 25 or 30 shares of the company. It's just a great way to not have to constantly think about redeployment of cash. Not everyone actively manages their portfolio in such a way. This is a really great way to set it and forget it.
Either way, if you are the type of person who manages your portfolio pretty actively, I see no problem at all in taking cash and reinvesting it at no commissions in whatever your favorite idea is. If you're a person that doesn't want to look quarter by quarter like that, reinvest those dividends. It'll add up over time.
Hill: I also think that, you can look at some of the companies in your portfolio, and the ones that you are the most confident about, that you have the greatest affinity for, if they're paying a dividend -- this is how I do it in my own investing -- I'm just putting it right back into that stock.
Gross: Yep, for sure. But not every company pays a dividend, obviously. Some of your favorite companies may not pay a dividend. Then it would be nice to have some cash to increase your position just by buying shares. You can do a combination. Maybe invest some automatically and take some in cash. It just depends what kind of investor you are, how much time you want to spend looking at your portfolio.
Hill: It's a great question! Thank you, Rod! Keep the questions coming on Twitter and through email, and also on YouTube. We started this a few months ago, doing live Q&As a couple of times a month on YouTube. You can find The Motley Fool's YouTube channel, youtube.com/themotleyfool. They went well, and now we're doing them every week. This Thursday afternoon, Ron, you're going to join me. Emily Flippen is joining us as well.
Hill: We're going to be taking questions from the viewers. We're also going to be talking about something that is right up your alley, which is cheap stocks.
Gross: Are there any cheap stocks anymore, Chris? [laughs]
Hill: There are cheap stocks out there. We'll also be talking not just about cheap stocks, but also about the perception.
Gross: Yeah, the theory behind it.
Hill: There are stocks that cost hundreds of dollars, but on a valuation basis, they're cheap. But then there are some stocks out there that are under $20 where it's like, "Yeah, this is one to put on your watchlist."
Gross: Can't focus on the stock price. Have to look at the whole company.
Hill: So, check that out every week on our YouTube channel. You can check those out. You can submit questions.