Back in August 2024, I heard a lot of news about Warren Buffett accumulating Occidental Petroleum Corporation (OXY) stocks. Thinking that the most influential investor of our time was heavily investing in OXY, I jumped in. My first position was purchased at a price of $56.25.
Unfortunately, the stock price continued to decline, and I kept purchasing additional shares to lower my average price. My last batch of shares was bought at $48.75, but as you can see, the decline was massive and continuous. By the end of December 2024, I decided to sell all my OXY stocks and take the losses. This decision was partly driven by my loss of hope in the stock’s recovery and partly to realize the losses for tax purposes to offset some of my gains.
Fast forward to January 15, 2025. I received a small dividend from OXY, even though I no longer held the stock at that point. Since I had enrolled all my stocks in DRIP (Dividend Reinvestment Plan), the dividend was immediately used to buy fractional shares of OXY. Here’s where things got surprising. At the close of business on January 15, OXY had a closing price of $52.20, but my fractional shares were purchased at $62.36. This price was far higher than OXY’s closing price on that day and was never a price I saw during my ownership of the stock.
Another shock came when I noticed the position was marked for a Wash Sale. (For those unfamiliar with Wash Sales, check out my article here: Understanding Wash Sale.)
I started a chat with ETRADE customer service to clarify the discrepancy in price. Their response was that I didn’t get the best price because OXY does not participate in any discount program for DRIP. When I asked if ETRADE had a list or an indicator to show which stocks participate in discount programs, they replied that there was no such list and the only way to know was to ask customer service—which I find incredibly inconvenient.
This experience made me question: Is it worth it to participate in DRIP (Dividend Reinvestment Plan)? Or would it be better to receive the income in cash and have the flexibility to select and buy investments at a price I like, rather than at some arbitrary price decided by the broker?
Pros of DRIP
- Automatic Reinvestment:
- Dividends are automatically reinvested into additional shares, promoting compounding growth.
- Great for long-term investors who don’t need dividend income immediately.
- Fractional Shares:
- Every dollar of your dividend is reinvested, even if it’s not enough to purchase a full share.
- No Fees (Typically):
- Most brokers, including E*TRADE, do not charge additional fees for reinvesting dividends.
- Discipline:
- DRIP automates reinvestment, encouraging consistent investment over time without emotional decision-making.
- Tax-Advantaged Accounts:
- In accounts like IRAs, where dividends are not immediately taxable, DRIP can maximize growth potential without worrying about tax implications.
Cons of DRIP
- Lack of Control Over Purchase Price:
- Dividends are reinvested at market prices or prices determined by the broker, which may not be favorable.
- As in my case, you might get a purchase price far above the market rate.
- No Discount for Some Stocks:
- While some companies offer a discount for DRIP participants, many do not. Unfortunately, there’s often no easy way to determine this upfront.
- Diversification Risk:
- DRIP reinvests dividends into the same stock, which can lead to over-concentration in a single company, especially if the stock underperforms.
- Tax Complexity:
- In taxable accounts, reinvested dividends are still taxable as income, even though you’re not receiving the cash.
- Tracking cost basis for reinvested shares can become complicated over time.
- Arbitrary Purchase Timing:
- DRIP doesn’t allow you to time the market or purchase at dips. You could end up buying shares at a relatively high price.
When DRIP is Ideal
- Long-Term Investment Goals: If your focus is on building wealth through compounding returns, DRIP can be an excellent tool.
- Tax-Advantaged Accounts: DRIP works well in IRAs or 401(k)s where tax on dividends is deferred.
- Low-Volatility Stocks: Stable, dividend-paying companies are ideal candidates for DRIP, as the risk of significant price swings is lower.
- Investors Who Prefer Automation: If you don’t want to actively manage dividend income or time the market, DRIP simplifies the process.
When DRIP Is Not Ideal
- Need for Cash Flow: If you rely on dividends for income, taking the cash rather than reinvesting might be more practical.
- Taxable Accounts: In a taxable account, reinvesting dividends can create unwanted tax liabilities and tracking headaches.
- Overvalued Stocks: If the stock’s price is high, reinvesting dividends might not be the best use of funds.
- Desire for Diversification: Taking dividends in cash allows you to reinvest in other stocks or asset classes, improving diversification.
- Opaque DRIP Policies: If your broker doesn’t provide clear information about DRIP discounts or pricing (as in my case with E*TRADE), you may want to take dividends as cash to have more control.
Conclusion
My experience with OXY and E*TRADE’s DRIP raised significant questions about whether DRIP is worth it. While it offers automation, compounding benefits, and fee savings, the lack of control over purchase price and the opaque nature of discount participation can make it less appealing. For investors like me, who value control and flexibility, taking dividends in cash and reinvesting them selectively might be a better approach.
Ultimately, whether DRIP is right for you depends on your investment goals, tax situation, and preferences. It’s crucial to evaluate the pros and cons and decide based on your unique circumstances. And remember, always ask questions about your broker’s policies to avoid surprises.
Related Articles:
- Understanding Dividend vs. Growth Stocks: Differences and Examples with 1-Year Investment Returns
- How to Know When to Buy a Stock
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