Should I Reinvest Dividends? WWWD?
Conventional wisdom on Wall Street says that you should definitely reinvest any dividends you get. Then again, look how well Wall Street's conventional wisdom has done for you over the years.
If you are blindly speculating in stocks or putting money into Wall Street's mutual funds, reinvesting your dividends may very well be the only thing that saves your portfolio. But, if you are buying wonderful businesses at a discount, reinvesting suddenly becomes silly. After all, Warren Buffett doesn't do it. He's pretty smart, right?
A Quick Look At His Holdings
Berkshire Hathaway owns or controls 200 million shares of Coca-Cola (ticker: KO). Its position is the same as it was in 1999. With KO's dividend at $1.36 a share, Buffett is collecting $272 million a year in dividends. But...he's not reinvesting them.
Wall Street Says...
If Buffett were reinvesting his dividends, he'd increase his position in KO by another 2% or so each year. Following that advice since his initial purchase in 1988, Buffett's stake in Coca-Cola would be much larger today.
That's Not What He's About
Buffett isn't interested in owning large stakes in businesses—he is interested in creating wealth for his shareholders. Owning large pieces of businesses comes with the job.
Considering that Buffett's primary goal is growth, he would silly to reinvest his dividends (and he doesn't). Though a gambler can get short-term growth anywhere, to get growth as an investor you have to buy businesses when they are on sale. When they are not on sale, you have to find value elsewhere—even if that means sitting in cash.
Once Coca-Cola began trading at a price that was no longer "fair" to Mr. Buffett, he stopped buying it. Buying Coca-Cola at a discount was brilliant. Investing that $272 million in dividends in a company that is overpriced is, well, the opposite. Why overpay for value and guarantee a poor return when you can simply be patient until you find the next Coca-Cola?
What Are You About?
When it comes to your money, are you one who buys businesses at a discount and refuses to overpay—even in "dividend-size" increments? Or, do you follow Wall Street into the market and secretly hope that your reinvested dividends make up for Wall Street's mistakes?
Also Filed Under "How to Think About Investing"
Joe Ponzio's F Wall Street
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John
Dec 31st, 2007
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Joe Ponzio
Jan 8th, 2008
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Joe Sheehan
Feb 12th, 2008
1 comment
I changed this setting in my investment account but then changed it back when I realized that $42/quarter wasn't going to be a noticeable appreciation to my investment budget.
Great website, I've been perusing the archives for a few weeks and have enjoyed your insights alot. I thought your analysis of the BNI purchase was outstanding, not many investors realize that kinda stuff.
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Joe Ponzio
Feb 12th, 2008
Joe on twitter
Ponzio Capital
A lot of investors view dividends as "free money" from the company and choose to reinvest them. In fact, I believe that most investors should reinvest dividends, particularly if they are not 100% committed to trying to reinvest 100% of their money at high rates. Except for the most active, non-conventional investors, dividends should be reinvested, even at the expense of a few percentage points (if that many) down the road.
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Jeff
Apr 14th, 2008
If I own a stock, then I believe it is undervalued, otherwise I wouldn't own it. I'm not Buffett and I don't have to hold overvalued stocks because I have 100 billion to put to work.
That means, when I get a dividend, and reinvest it, I am putting it back into an undervalued stock. Therefore, when the stock does propel up to intrinsic value, I now have made more money because I have owned more of my previously identified undervalued stock, instead of looking for a new one...
Curious on your thoughts there. The only scenario where I could see that you wouldn't want to do it is if you are a buy and hold forever type investor, a more modern Buffett. But for those of us who can buy undervalued and sell when overvalued, shouldn't reinvestment make sense?
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Joe Ponzio
Apr 14th, 2008
Joe on twitter
Ponzio Capital
You are dead right. So long as the business is selling at an acceptable margin of safety, you can absolutely reinvest the dividends and "average down". If, however, the price moves above the MOS - even slightly - you are then messing with your strategy.
If you can buy at a 50% MOS and then reinvest at a 60% MOS, you are doing just fine. If, however, you buy at a 50% MOS and then reinvest at a 10% MOS, you are risking your money on an opportunity offering relatively little growth potential and safety.
When you start accepting a lower MOS - even with a 2% dividend - you can run into big trouble.
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Mar 14th, 2010