Optimizing the USDP – Enabling The DRIP

avatar By: IS
Date posted: 08.16.2012 (5:00 am) | Write a Comment  (0 Comments)

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When I started off the Ultimate Sustainable Dividend Portfolio (USDP), I had mentionned that I would not be using a DRIP feature to automatically reinvest dividends. As a reminder:

What Is A DRIP?

A DRIP is a dividend reinvestment plan, makes it possible for an investor to automatically reinvest the proceeds of a dividend into that stock. To be clear, the investor or fund is still receiving the dividend in cash. I say this because you’d still have to pay taxes on the dividend even though it was never truly added to your account. This can be offered either by the stock or the broker that you do business with.

What Are The Main Benefits?

The three main reasons why I will finally start doing this exercise next week are:

-I will be able to keep my money invested in the portfolio. Currently, I have a significant portion invested in $, that originates from the diividends I have received in the past year. It will be much more efficient to automatically reinvest

-While it’s far from a majority, certain stocks offer discounts when using the DRIP. For example, on a 5% discount, you would be paying only 95% of the price when buying the stock. That becomes free money and would clearly help the long term return of the USDP. The impact is limited but small improvements can make a big difference over the long term.

-This would diminish the number of trades needed to be done manually and thus the transaction costs, the time needed to manage the portfolio, etc.

Why Did I Wait So Long?

To be honest, I don’t have a good reason. My main reason was to keep the money in order to be able to more accurately rebalance the portfolio but that has not been done and to be honest, I should be able to do it no matter what. Currently, some stocks in the index have a bit more or less than the 5% target (100%/20 stocks) but I will be able to adjust those once in a while.

When Will I Get Started?

Next week, I will be making a trade to replace at least one of the name in the USDP. I will also reinvest whatever money is in the fund at that point and start using the DRIP which should mean that there will be little to no money that will be left “uninvested” going forward.

 

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