Under dividend reinvestment plans (DRIPs) the shareholder is given the option of receiving their annual dividends as additional common shares of the company, instead of a cash payment. The company assigns a value for the additional shares, based on a share price that is slightly lower than the market price. Most professional financial advisors encourage their clients to use this option, if it is available, because the client does not have to decide what to do with their cash dividends, since they are automatically converted into company shares. In addition, you avoid trading and brokerage fees when you acquire the shares through a DRIP.

I agree that for those investors who have little or no interest in managing their investments, DRIPS are a useful option. However, in my opinion, for those investors who are actively managing their investment portfolios, the disadvantages of DRIPs outweigh their advantages. In particular, the prevailing market price of the shares may be significantly higher than their fair share price, in which case you are buying the shares when the P/E ratio is near an historically high value. Secondly, even if the prevailing market price is lower than the fair share price, you may have other companies in your portfolio which can be purchased at an even greater discount to their fair share price, and possibly near an historically low price.

For anyone who is willing to take the time to monitor and manage their investments, it is preferable, in my opinion, to receive all of your dividend payments as cash, which can be left to accumulate in your portfolio. When the market price of one or more of your favourite companies falls, such that the P/E ratio is near an historically low value,  you can use your accumulated cash to buy additional shares.

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