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Pawche  
#1 Posted : Monday, May 7, 2018 3:28:00 AM(UTC)
Pawche

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Reinvesting portfolio earnings is a basic tenet of the BetterInvesting philosophy. This allows for compound growth of the portfolio. Methods to accomplish reinvesting earnings vary. One popular method is using Dividend Reinvestment Programs or DRPs.
Enrolling in a DRP has the advantage of automatically reinvesting dividends in more shares of the company. These plans also allow for dollar cost averaging. Since the dividends purchase fewer shares when the price is high and more shares when the price is low this tends to drive the average price per share down a bit. Enrolling in a DRP looks like a no brainer decision if you purchase stock in a dividend paying company.
DRPs do have some drawbacks that are often neglected. Two drawbacks are related to work tracking reinvested shares. Each purchase generates a new tax lot. When a sale is eventually ordered, reconciling individual lots on a form 1099 may be a small challenge. Brokers often combine reinvestment lots under one “various” designation for purchase dates. Accounting software generally does not consolidate tax lots in a similar manner. Another record keeping issue relates to selling partial positions. Identifying the individual lots to be sold and reconciling with the action of the broker can be a challenge unless the first-in-first-out (FIFO) method is always used for stocks in a DRP.
Enrolling in a DRP plan also increases the chance of generating a wash sale. If some shares are sold at a loss, an automatic reinvestment within 30 days before or after the sale will generate a wash sale. Currently, accounting for wash sales is more work for a treasurer and notification from your broker may not be until the 1099 is received.
Buying quality companies at reasonable prices can also be partially compromised by DRP plans. If dividends are automatically reinvested in the same company the odds of purchasing shares when the price for the company is no longer reasonable increase. The dividend could have been used to purchase more shares of a more reasonably priced company.
Like most things in life DRP plans have their benefits and liabilities. Weigh the pros and cons of using a DRP for your situation before enrolling.

Russell Malley
thanks 1 user thanked Pawche for this useful post.
gerlach on 6/1/2018(UTC)

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