knawing on the old bone...

Is I was doing my nightly investment reading (sad isn't it, that I am doing this rather than reading a good novel, no?)  I came across another spirited debate over the relative merits of selective dividend reinvestment and automated dividend reinvestment.

I have thrown my lot into the DRIP category. I like to see the whole portfolio growing. I don't want to be forced to do the "best value proposition" dance every time my cash balance builds up a bit. I have to make decisions with new contributions anyway.

I'm tempted to just turn away when I see this argument developing in the comment section of articles I read, but it's worth taking a slightly longer look at one versus the other.  There are a number of issues that are bandied about in these debates.

First; fees. selective reinvestment incurs brokerage fees. DRIP doesn't.

Second; cash balances. Selective reinvestment causes you to hold cash. DRIP doesn't. As soon as it's distributed, it goes to work.

Third; valuation. Selective reinvestment allows/requires you to choose among holdings to augment, or choose a new stock to purchase.  The DRIP program, if applied universally, grows the whole portfolio.

Other things aside, the primary argument made for selective reinvestment is the opportunity to buy the best value at any given point, and choose when to deploy the funds.

What is going on, however, with the DRIPer while the selective re-investor is holding and building cash and making choices on which purchase to make?  In a given quarter, a 50 stock portfolio will make 50 purchases of approximately 0.5-0.75% of the position. Not only will any given single stock be somewhere between it's 52 week low and high, but the 50 some-odd purchases made will distribute across the spectrum of relative valuations represented by those 50 holdings. It is unlikely that every holding would be either over-valued or under-valued simultaneously.

Since the general trend of valuations is up, the net effect over time is that DRIP purchases will be below current price. Selective reinvestment purchases will be made in blocks, hopefully at favorable valuation for the identified company at any given point, but the purchases for a given holding will be few and far between.

The DRIP is a form of dollar-cost averaging without brokerage fees. It takes all emotion out of investing 3-4% of the portfolio value every year.  I am currently adding about 5% per year to my retirement portfolio, so the DRIP handles about 40% of my investing for me across the spectrum of my holdings.

New contributions must be selectively invested. That means a wish list, a watch list and monitoring of existing holdings for favorable valuation.