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Ask a Fool: Is Dividend Reinvestment Necessary Anymore?

By Matthew Frankel, CFP® - Oct 25, 2019 at 12:00PM

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Given two recent developments in the brokerage world, is a DRIP still the best way to go?

Q: I've had all of my stock investments enrolled in a dividend reinvestment plan for years. With commission fees being eliminated and many brokers rolling out fractional share trading, is this still the best way to go?

I've personally written tons of content about the benefits of DRIP investing over the years, but I have to say that it's starting to become a bit less appealing.

If you aren't familiar, a dividend reinvestment plan (DRIP) takes the dividends that you get paid by the stocks you own and reinvests it back into additional shares. And there have been three main benefits to doing this as opposed to simply buying more shares yourself when dividends are paid:

  • It's automatic.
  • There are no commissions on shares bought with reinvested dividends.
  • You can buy fractional shares, thereby putting all of your dividend to work.

Well, now that virtually all major online brokers have eliminated commissions, and some are starting to introduce fractional share trading, two of these benefits seem to be going away. If I get a $50 dividend from a stock that trades for $100 per share, I can now use that $50 on my own and purchase 0.5 additional shares.

Sure, the automatic reinvesting is convenient, and if you prefer to keep your compounding on autopilot, there's a lot of value in this benefit. However, doing it on your own allows you to invest your dividends in whatever stock you think is the best investment at the time, which may not necessarily be the stock that paid the dividend.

In short, if your broker offers both zero-commission trades and the ability to buy fractional shares, there's a solid case to be made in favor of un-enrolling from your DRIP and investing the cash as you see fit instead.

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