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Dividend Investing: Pros and Cons of DRIPS (Dividend Reinvestment Plans) - YouTube
Channel: Money and Life TV
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when we're talking about drips we're not
talking about a leaky faucet no! no! drip
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stands for dividend reinvestment plants
in 2018 drips are becoming highly
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popular among investors and have a lot
of great benefits but before you dive in
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and engage in one of these investment
strategies it's important to know the
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pros and the cons if you don't know how
drips work don't worry it's it's fairly
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simple to explain let's say a
shareholder owns one stock once you're a
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stock of McDonald's
well McDonald's is a company that
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normally pays dividends now when
McDonald's pays dividends normally that
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shareholder would receive that dividend
payment in the form of cash that cash
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dividend would be deposited directly
into their brokerage account now let's
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explain how that works in a drip
arrangement when McDonald's goes to pay
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that dividend instead of sending that
cash payment dividend to that
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shareholder what will happen under the
drip arrangement is that dividend
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payment will go automatically to
repurchase more shares of McDonald's
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stock even if the shareholder doesn't
have enough to purchase a whole share of
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McDonald's stock there under the drip
arrangement they're able to purchase
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fractional shares of McDonald's stock so
basically as you can see in the example
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under a drip investment strategy instead
of getting dividend payments in the form
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of cash you're automatically having your
cash reinvested into that company stock
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now let's talk about those pros and cons
the first major pro of having your
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investments in the drip type of
arrangement is that you have the
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potential for faster compounding
interest under a drip plan you don't
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have to worry about money going into
your brokerage account from dividends
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and just sitting there idle no that
doesn't happen so your money as in that
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McDonald's stock example we just talked
about gets automatically reinvested for
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you without you doing anything at the
date of the dividend distribution so
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your money is quickly being reinvested
immediately which in the long run helps
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add to the compounding interest boost
that so many investors are looking for
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one of the coolest things about drips is
that they're pretty much open to all
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investors you don't it doesn't matter if
you're a big investor in small investor
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you can own as little as one share of
stock if a company off
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a drip and get involved and enrolled in
that drip investing strategy so rich or
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poor folks doesn't matter you can start
investing this way starting immediately
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the third Pro is that under a dipper
range meant when those when those
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dividends are used to be reinvested to
repurchase more shares of that company
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stock it usually occurs with under most
situations with little to no investment
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transaction fee that's right you're
saving money on fees we all know we're
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looking fees so if you're a drip
investor that's a very good thing
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working in your favor
the fourth pro of investing in a drip
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plan is that under some circumstances
now not all companies offer this but
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many do is that if you're enrolled in a
drip plan with that company let's say
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McDonald's for example that sometimes as
a shareholder you can have your
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dividends reinvested and when you go to
purchase those reinvested shares or when
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those dividends are used to repurchase
more shares you sometimes can the
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company will offer you a discount on
those share repurchases and I've seen
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discounts ranging anywhere from one to
ten percent so it's not for every
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company but me up companies will offer
you discounts if you're enrolled in
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their plan to constantly reinvest your
dividends into their company stock the
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fifth pro of having a drip investing
strategy is it's low maintenance right
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now when you're enrolled in a drip
investing plan you don't have to worry
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about trying to figure out where to
invest your dividends because it's being
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taken care of for you so you can do
other things like go play fortnight or
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if you're messed up like me you can
reinstall and play Diablo 2 once again
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after 17 years so those were the five
pros now let's talk about those pesky
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cons the first con when it comes to drip
investing is that your investments might
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lose some flexibility what do I mean
well if you think about it if you
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constantly have your dividends being
repurchasing the same shares over and
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over again your portfolio might
eventually start to lack diversification
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and not only that because you're
enrolled in a special drip investing
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plan your investments may become less
liquid so if you see the market
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going up or down and if you want to sell
quickly you might not be able to it
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might take you more than a day to sell
or maybe a week to sell I don't know it
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just depends on the company but you're
gonna lose some of that liquidity with
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your investment when it's enrolled in
the drip plan the second con is one of
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the biggest ones is that you don't
receive the physical cash right because
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that cash is reinvested to purchase more
shares but in the eyes of the IRS you
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still have to pay tax on that because
the IRS says well even though you
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decided not to take the cash mr.
investor you have to pay tax on those
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dividends and in terms of taxes those
drip dividends that are reinvested or
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reinvested dividends are taxed just like
any other normal dividends so if you're
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planning to reinvest most of your
dividends and to these drip plans with
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these different companies realize that
you better have other income to help pay
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the taxes when you go to file your tax
return because you're gonna have to pay
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taxes on those dividends when it comes
to tax filing season many people do not
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realize that the third ton of drip
investing is related to tax as well in
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that it can create messy record-keeping
are more complicated record-keeping so
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what happens when you invest in a drip
plan when you and I invest in one of
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these plans the brokerage company or
with let's say your with TD Ameritrade
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or Robin Hood well once you're into one
of these drip investing plans with let's
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say McDonald's or Johnson & Johnson
whatever your brokerage company is
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probably no longer gonna be able to keep
track of all these reinvested dividends
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and so if you ever want to go to sell
that stock you're not going to have
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proper cost basis records unless you've
been keeping track of your cost basis
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the whole time so what you want to do
knowing that you're gonna go into one of
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these plans if this is something you
want to do I will tell you what you want
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to do is write down your initial cost
basis of that stock so your initial
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purchase price that that stock and then
once it's in the drip plan and you start
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getting those reinvested dividend
amounts keep track of all those
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reinvested amounts that are used to
repurchase shares because you have to
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know when you when you go to sell or if
you eventually want to sell that
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investment you're going to want to know
your initial purchase price plus the
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value of
all those reinvested dividends and some
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of them goes on for years and I've seen
it firsthand because you guys know I
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prepare taxes for a living and it does
get pretty messy so just so you know
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make sure you're keeping good records
and track of your cost basis so that
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when you go to sell your stock you're
not gonna pay more tax than you need to
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Khan number four drips they're really
not for short-term investors if you're
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getting involved in one of these plans
you're thinking long term you're going
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long okay so it's like I said earlier
it's they're not very flexible so if you
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can't quickly get in and out of these
things these are long-term arrangements
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and each company might have different
restrictions that allow drip plants so
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just keep that in mind if you're
thinking you just want to be a
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short-term investor and maybe you want
to invest for less than the year a
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couple years it might not even be worth
it to get involved in one of these
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plants the fifth and final con and it's
one of my biggest pet peeves about these
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investing strategies is that your
dividend payments you you might not be
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getting the highest and best use of your
cash dividends you so you have to
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realize what if you're having your cash
dividend payments automatically reinvest
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it in these same stocks over and over
again what if you know what could you
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have done differently with that money or
with those dividends if you would have
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just received it in the form of cash
could you have done better you have to
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think about this because you have done
better investing in other companies with
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those dividends so just because you're
constantly repurchase is seamless Seamus
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there is a stock it doesn't necessarily
mean you're buying the best investment
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over and over again
so in summary drips can be a great
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investing tool for long-term investors
drips can minimize transaction cost and
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it may allow you to purchase some stocks
at a discount and allow even the
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smallest investors to participate just
by owning a single share of stock having
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your dividends automatically reinvested
will further fuel the compounding
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interest growth of an investor's
portfolio but remember a drip comes with
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a price the price is the investments
become less liquid your dividends may
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not be receiving highest and best use
tax record-keeping becomes more
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complicated and an investor will have to
pay tax on the reinvested dividends even
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though
not receive the money now that you guys
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know the pros and cons when it comes to
drips what are your thoughts do you
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think they're a good idea do you think
you're a bad idea who do you think would
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benefit from them why or why not let me
know all of your thoughts down in that
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comment section down below I would love
to read what you guys have to say about
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these things in the comment section down
below I'll be leaving my overall summary
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and conclusion on drips so make sure to
read it and check it out and let me know
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what you guys think well guys that is
all the information I have for you today
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make sure if you have not seen some of
my other dividend investing videos I
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will link them up here in this card and
also down in the description section
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down below I have a whole playlist
dedicated to just dividend investing and
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I'm gonna continue to grow this playlist
over time you know if you guys like this
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video if you want to see more content
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like button share this information with
a friend especially a friend you know
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know how drips work and the pros and
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cover here on money in life TV alright
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guys well thank you so much for hanging
out with chipper and I once again on
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money in life TV it is always so much
fun to interact with each and every one
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of you and to learn about your different
investing strategies and what you have
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going on in your life so until next time
use this information to live your life
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on caged I will see you guys in the next
video peace
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