How much does the quarterly dividend reinvestment in a DRiP boost your yield? Has there ever been a historical study done on what your yield would have been in a DRiP v. a brokerage account(in which you reinvest dividends annually or semiannually depending on when it makes sense because of commissions)? I'm particularly interested in how this relates to the Baby Bell stocks. Thanks.
Hi, Juggernaut8!How much does the quarterly dividend reinvestment in a DRiP boost your yield? Has there ever been a historical study done on what your yield would have been in a DRiP v. a brokerage accountI'm not aware of such a study, but I think it's worth mentioning that dividends are very often still reinvested in a brokerage account, albeit not right away. Since the shares are held in "streetname" and not your name, the dividends are paid to the account and become a part of the cash balance awaiting a future purchase.Just thought I'd throw that in for consideration.Fool on!Vince
Vince-I know they get paid into your brokerage's cash account, but then you have to wait, especially in the early years, for enough cash to build up in order for it to make sense incurring a brokerage commission to acquire new shares. From what I understand about DRiP's the dividends are reinvested immediately in the form of more fractional shares and I seem to remember reading somewhere that this additional compounding, while not seeming like much, can have a big effect on your yield in the long run. I don't know, I could be remembering incorrectly.
I'm kind of new at this DRP thing, but I'm in the process of setting one up for myself, and everything I've read about them (both here and on www.moneypaper.com) seem to confirm what you're saying. As your dividends go toward buying more shares, instead of sitting as mere cash, you have the potential to realize a greater gain. If you find a study or analysis that demonstrates the compounding effect, please let us know about it. Thanks,Knavish
Don't get me wrong, the power of compounded reinvested dividends is great. Jeff provided some numbers to support this using Coke as an example a while back. I'll try to dig those up.My point, I guess, is that dividends in a cash account will usually get into the market before too long (may be weeks or months or maybe longer), and excluding those from a comparison wouldn't be totally fair.Foolishly, Vince
Vince-I'm don't have anything against those hardworking dividends, I just want them to get to work earlier and work longer hours. Lets say you put 2K into stock X in a brokerage account year 1. Let's say the yield is 3% or $60 for the first year. If you have more money to put in at the end of the 1st year fine, you buy one extra share or so with the cash from dividends. But here are some advantages of the DRiP, which you probably already know: the first quarter dividends go in for .75 of a year etc.,etc.,etc. and they go in for free or less than the cost of commission, which probably impacts your yield a lot especially in the early years(when you'd be ill-advised to spend $15 commission to put let's say $150 in quarterly dividends in). And think of year 20, where let's say due to some spectacular growth and additional capital paid in your account is worth 250K, with the same dividend yield of 3%. The $1,875/QTR you're now getting requires you to pay commissions four times a year in a brokerage account v. free and immediate in a DRiP. Don't get me wrong, the freedom and liquidity of owning stock in a brokerage account has major advantages, the main one being you can sell underperforming stocks and immediately put them into a better performing Maker or Breaker stock. BUT, if you have a stock that you're sure you're going to hold for the long haul it probably grows faster due to the more frequent compounding in a DRiP. But the $.50 question is how much faster?I think it would be interesting to run a simulation to see how fast growth would occur in a DRiP v. a brokerage account and I can't believe that someone in academia or Wall Street hasn't done it already. Maybe with all the fools out there that are not asleep at their monitors after reading this long-winded post someone knows the answer. Thanks.
I have had a DRiP portfolio going for about 2 years.It is nice to have those dividends buying you "free" shares in your account and has the effect of lowering your average share cost.This in turn effectivly increases your return(all without the evil brokeragefees that Drip's avoid). It seems to work for me.. Draxx
This may not be a direct answer to the original question, but some Brokerage companies like Fidelity and Schwab DO actually provide for dividend reinvestment. The day after a company of which you have shares in the brokerage account (Fidelity in my case) pays a dividend, that dividend is re-invested into additional shares, WITHOUT brokerage costs. Of course, the original shares did incur transaction fees, as will the final sale of them.E*Trade, on the other hand, does not do any re-investing of dividends (I asked).Sorry for slightly off-topic reply; just thought someone might want to know (and yes, I do have a "real" DRiP portfolio as well).
...some Brokerage companies like Fidelity and Schwab DO actually provide for dividend reinvestmentMy understanding is that brokers only reinvest dividends if the amount is enough to buy a full share. They don't purchase fractional shares as DRiP and DSP plans do. (Somebody please correct me if I'm wrong).Trevar
<<<E*Trade, on the other hand, does not do any re-investing of dividends (I asked).>>>>>You are slightly wrong they offer DRIP's for the DOW 30 at no charge and they purchase fractional shares..I am currently dripping WAL-MART this way simply because their fees used to be high when I started dripping them and this way was cheaper.
My understanding is that brokers only reinvest dividends if the amount is enough to buy a full share. They don't purchase fractional shares as DRiP and DSP plans do. (Somebody please correct me if I'm wrong). Trevar Depends on the broker. I have set up dividend reinvestment with my Roth IRA at Waterhouse. When dividends are issued, Waterhouse gives me partial shares. But there is no opportunity to send in OCP's for partial shares. All new shares must be bought in whole number amounts, paying commission of course. I figured that I would rather have partial shares than the cash earning 4%in the money market. So it really isn't a DRIP where you can make monthly OCPs, but you do get dividend reinvestment.Taylor
SureTrade is the broker with the "interesting" rule that dividends can only be reinvested into whole shares. Waterhouse reinvests dividends completely (my fractional share of Intel comes to 87/10,000 of a share <g>).george
<<<My understanding is that brokers only reinvest dividends if the amount is enough to buy a full share. They don't purchase fractional shares as DRiP and DSP plans do. (Somebody please correct me if I'm wrong).>>>Trevar,Waterhouse buys reinvests dividends and does so using partial shares. I have .0004 shares of Schwab in my brokerage account.BH
I didn't know that any of the brokerages allowed for fractional shares, this is interesting. Does anyone have any ideas about my original question as to how much the quarterly reinvestment in a DRiP effects your yield over the long term. In one of the daily portfolio updates they said the 1.5% difference in yield between a S&P Index fund and a small cap index fund can lead to almost double the account value after 30 years. If the quarterly reinvestment in a DRiP gives you anywhere near this amount of a yield boost this could be significant.
I stand (er... sit) corrected ;-)Trevar
Trevar-Wasn't trying to correct anyone, all the feedback concerning the discount brokerages reinvesting quarterly dividends and some doing it with fractional shares was interesting and helpful, since I didn't know anyone did it. I just wanted to keep the original inquiry going since I think it would be very helpful to everyone, especially anyone considering DRiPs. Any ideas on who else we could ask about this?
This is getting interesting....I have an account with Fidelity, and wanted to start a small one with Waterhouse. With Waterhouse the commission is reasonable, and they reinvest dividends for free, and no charge for certificates. My plan was to transfer shares every quarter from my Drips (the ones that charge to reinvest) to an account at Waterhouse. I wanted to made sure the reinvestment would work...this just sounded to good to be true. So I called Waterhouse, and I mentioned HD and PG....the rep told me that this cannot be done with all companies. He told me that companys with millions of shares out don't want to mess with the paperwork, and he doubted that HD and PG would allow the broker to reinvest the dividends.Confused now, I called Fidelity. The rep there said that all companys do , then I mentioned what I was told by Waterhouse....then he said, oh I dont think they all do.Has anyone run into this or have any comments?ThanksFilly
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