Wall Street wants you to invest blindly. It really does. If it can get you to give it more cash on a regular basis with no questions asked, all the better, especially if it can count on that cash coming in without having to deal with you over the phone or online.
In fact, it’s really at the core of so much of the regular stock trading throughout the year. Think about it. For millions of Americans, every two weeks when they get paid, a portion of their payrolls automatically get deposited into their 401(k) or other retirement plans, which get shoveled into mutual funds and other automatic execution.
This not only feeds the trading desks and brokerage companies, but it also feeds the trillions of dollars that fund management companies need to make their fee income. And companies, often the usual suspects from the S&P 500 that are the heavies in most individual investor accounts, get a regular stream of cash buying more of their shares, again with no questions asked.
This really isn’t how you should want your investment to happen. Why would you want to put thousands of dollars into the market, into funds or into stocks at arbitrary prices on arbitrary days, when the market could be doing anything?
Drip, Drip, Drip
This is where dividend reinvesting comes in. Just like regular contributions to accounts, automatic reinvestment of dividends poses the same problems for you, while being great for the companies that get their shares bought willy-nilly, and the same for funds or other dividend-paying investments.
This is why so many companies and funds as well as brokerages offer DRIP plans. DRIP stands for direct reinvestment plans or dividend reinvestment plans.
DRIPs can be an easy pitch to make to investors who don’t want to be bothered with the dividend cash coming into their accounts. And for many investors who don’t yet rely on their dividends for regular living expenses, the idea of letting the cash help to build up their portfolios automatically is a compelling one.
But you can do better.
Know Thy Stocks
Every week, I go through each and every one of my portfolio holdings and ask the question, “Would I buy this stock or fund all over again?” And if so, up to what price? If I can’t say, “Yes, buy it,” then it’s going to be downgraded to a Watch or go to a full Sell.
This happens every month for every issue of Profitable Investing. And if something big happens in between issues, then I’ll send out an emailed alert telling you what’s going on, why it’s happening and what to do about it.
The same thing should be going on in your own management of your actual portfolio. Every month when you get your statements, you need to go down your list of holdings and do the same kind of review.
By doing this, you’ll only get better and better at knowing your stocks and knowing when they are getting too expensive to buy or are on a great sale on any day of the trading week.
This is crucial for investing and can help you avoid holding a company that’s in decline, holding one that’s reached its peak or missing one that’s trading at great prices.
And it makes for a whole other, better way of reinvesting your dividends.
I always focus on stocks paying regular and higher dividends throughout the year.
But if you’re not taking the cash out, then you need to reinvest it, right?
Doing it on autopilot by a DRIP or other automatic arrangement will mean that you’re buying stocks at arbitrary prices that might not be the best deal for you. Over the long run, that can cost you some bigger returns.
Instead, take your dividend cash and pile it up. Then keep an eye on your stocks and redeploy that cash when your stocks are on sale.
This isn’t that hard, nor does it mean that you need to be holed up in front of your computer throughout the day.
Instead, if you know your stocks and just keep a general eye on them, all stocks will have down days, weeks and months that will provide you with great opportunities to buy more at better prices.
And by doing this, even with generally very stable-priced stocks, you can really boost your returns.
That adds up to real money and more stock to pay you even more dividends as the years add up.
Just a little more work by generally paying attention throughout the month and you can use this practice to create a better reinvestment plan for yourself. It will certainly be better for you and your savings than it will be for your broker.
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.