6 reasons NOT to use Dividend Reinvestment Plans


Before you jump at the enticing promises of Dividend Reinvestment Plans, there are potential negatives that should be considered. These points may counterbalance the positives, and will make you think twice next time you sign up.

Buying on the Company's Schedule

When you choose to reinvest your dividends, you are at the mercy of the company's schedule. The company chooses when, and if they want to offer dividends, and when the dividend reinvestment plans are activated. If the stock price at this time is at an all time high on that day, then you will be paying that price. You cannot opt to wait till the market drops for a better buying opportunity.

No choice of Stock

When you reinvest your dividends, you are choosing to place extra money in the stock you've already purchased. You are assuming the company and stock will continue to have sound fundamentals in the future. Just because a stock has sound fundamentals today, doesn't make it a great buy a few years down the track. This money may have been better spent investing in stocks with higher growth potential

Losing Liquidity

Normally, when you trade stocks through an online broker, the orders are executed within seconds. And few hours or days later, the money is back in your bank account. Quick, easy access to your money in case of an emergency.

disadvantages of dividend reinvestment plans
When you buy or sell stocks directly through the company, that liquidity is no longer available. To close out the DRIP, you have to contact the company's plan transfer agent, obtain, complete, and submit the forms required. After approval, this process could have taken weeks. In addition, the company may charge you fees for closing the account.

Additional Fees

DRIPs can be cheap and commission free. However, when you look into the fine print, you'll find only half of most DRIPs are completely fee-free. Some companies try to quietly slip in fees for every transaction. A $25 transaction can incur a $5 fee. Remember to read the prospectus carefully so you are not surprised later on.

Taxes

Ah, taxes, everyone's least favourite topic. Even though you won't receive a cheque, or cash in your bank account for all those reinvested dividends, they are still taxable income. Every country's tax laws are different, so check with your accountant regarding how much tax you have to pay on these.

Keeping Detailed Records

Some companies will send you a letter with your total dividends, and outlining which dividends and capital gains qualify for reduced tax rates. Some companies won't. You are responsible for keeping track of each dividend reinvestment purchase, the purchase price, the purchase date, and the number of shares purchased. This information is required when you submit your tax return, and can be a nightmare if you don't meticulously track each and every transaction.


Depending on the company, and their fine print, the above negative points of DRIPs can sway you from choosing to participate in Dividend Reinvestment Plans. Remember, you always have the alternative: to accept the dividend cheque, build up your account before choosing when, and what stock is best for your portfolio.