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Dividend Reinvestment

When you have dividend paying stocks in your portfolio, you get a share of the earnings paid back to you in the form of a dividend, usually around 3-4 times/ year (although it ranges from monthly to annually). They will automatically be added to your stock brokerage account and will impact the positive (you don’t have leverage), or negative balance (you are using debt/leverage).

The exception to this is if you have an automatic dividend reinvestment program set-up. This means that instead of getting a cash payout to your account, you get more shares of the same stock. I don’t like these programs for many reasons, but I’ll list my top 5:

1. Not all brokerages even offer them. Most of the discount ones don’t. And one of the huge factors in total return is cost, so it’s really not worth it to pay more to have this program.

2. It’s nearly impossible to keep track of your cost basis for that stock (for tax reasons or just to figure out your return).

3. It doesn’t factor in the “cost” of that stock, it just buys automatically. I have around 30 stocks in my portfolio and when I have money to buy more stocks, I’ll buy whatever of these stocks is “cheap” by looking at some different metrics, such as P/E Ratio, payout ratio and history of earnings/dividend increases.

4. It puts investing onto auto-pilot. It’s what some people want, but I’d much prefer to be making my own conscious decisions and staying informed about what’s going on with my portfolio and the stock market as a whole.

5. You end up with fractional shares of stocks. How do you sell these when the time comes? It’s nearly impossible I would imagine.

Check out Dividend Stocks For Dummies for more detailed information about Dividend Stock Investing.

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