You will sometimes here people say they receive no income each year as they just reinvest those dividends or distributions automatically by way of a dividend reinvestment plan (DRP). These are programs that companies run to allow their investors to receive additional shares or units rather then cash for each dividend/distribution paid.
Some people will argue that joining a DRP is a great way to save brokerage. Sure we do agree with that statement on it’s own as commission drag is one of the biggest reasons why new traders/investors fail. But if you have enough earnings from your investments then you can just buy a new parcel of shares when you wish to. Or just be smart and save up a reasonable amount before making a new purchase.
Some will argue they can be forced savings. This is that you are forced to invest rather than get the cash and possibly spend it on things that will be worthless in a months time using Zip or Afterpay.
Some will say “but I get a discount on my DRP’s”. Sure you sometimes can get a discount of between 1 to 5% on DRPs, but the below costs will far out way any discount received, that is for sure.
The biggest issue with DRP’s and one of the sole reasons why we recommend you DON’T USE them is the record keeping costs. Sure your thinking, it’s just a few shares here and there, it can’t possibly add up. But if you are like one of the many who use an accountant to prepare their taxation affairs each year then you WILL have an issue. Your fee for the year in which you sell any stocks that have been participating in DRP’s will be higher. And if you invest over a few years then you will see your accountants fee being substantially higher. And if you invest for your lifetime, then pass away and leave your dependents to “clean up the mess” then the fees will be even higher. Not that your dependents will notice how much of YOUR money gets allocated to accounting fees prior to them getting their little hands on your estate. All this because you thought your were being cool and fancy by electing to use a dividend reinvestment plan.
You see for every DRP parcel received this needs to be accounted for as basically another new stock purchase. All these purchases take a lot of time to calculate and work out the necessary total costs you have paid for an investment. And as you all should know “time is money” as they say. And with an accountant time is BIG MONEY. As long as commission drag isn’t destroying your trading/investing then it is far cheaper to just pay a little brokerage and buy a reasonable dollar value parcel of shares or units when you wish to rather than having all these little DRP’s all the time.
So for that reason alone we recommend you NEVER USE DRP’s and advise all your friends to do the same.