Once a DRIP (Dividend Re-Investment Plan) is started the company will automatically re-invest your dividends back into their shares instead of paying you the cash dividend. DRIPs allow you to accumulate more shares over time without investing any new money. But I don’t use DRIPs, and I don’t advocate using DRIPs, here why…
The biggest problem with DRIPs is that you end up inadvertently buying stocks when they are overvalued. Stock prices go up and down all the time. Watch my short video which shows you how to figure out if a stock is undervalued or overvalued. You want to avoid buying stocks when they are priced high. But with a DRIP you have no choice, you may end up buying stocks when they are priced high. For example if I bought shares in Walmart for $50 because they were undervalued, do I really want to be buying more shares when they are overvalued at $100? I would prefer that the company give me the dividends in cash, then once a year or twice a year I can take that money (plus dividends from other companies) and invest it into another stock that is undervalued. There is no harm in sitting on cash for a while. Some people put their money into a Money Market fund as a temporary parking spot while they wait to accumulate enough cash to buy more stocks.
DRIPs are good for people who:
- do not want to review their portfolio at least twice a year or even once a year
- want an automatic investing system that they can forget about
- want an automatic system of forced savings
In my course I teach you exactly how to determine when a stock is undervalued and when it is overvalued. With this knowledge you should never purchase stocks that are overvalued. I believe any benefits of dollar cost averaging are lost when you buy stocks that are overvalued. It is always better to buy quality stocks when they are undervalued.
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Article originally posted by simply investing.