Create Your Own Customized Dividend Reinvestment Program

There's more than one type of dividend reinvestment program.

I've written elsewhere about Dividend Reinvestment Plans and the power of reinvesting dividends.

In short, reinvesting dividends is simply using the proceeds of your dividend income - either through a company-sponsored DRIP or a dividend reinvestment program with your online broker - to automatically purchase additional dividend paying shares.

When combined with dividend growth, the result is an ever increasing stream of dividend income.

Conventional Dividend Reinvesting

The conventional approach to reinvesting dividends has been those already mentioned above: officially through a company-sponsored DRIP or unofficially through your online broker. Both also have the advantage of being commission-free.

There are definite benefits to these dividend reinvestment plans.

But there are also a couple of drawbacks as well:

The tax accounting and cost basis tracking in taxable accounts can be a major headache. Purchasing shares and partial shares every three months, potentially for decades, is a lot of minutiae to keep up with.
The bigger drawback, however, is the danger of over concentration in individual dividend paying companies that turn out to be less than the highest quality. Imagine reinvesting dividends in a company like GM for a few decades only to watch everything come crashing down, destroying both your net worth as well as your previously impressive cash flow. Remember - not all dividends are created equal.

A Personal Dividend Reinvestment Program

Of course, there's no reason why you can't reinvest your dividends on your own in a way that makes more sense for you. Many proficient long term investors approach dividend investing precisely this way.

Instead of reinvesting dividends from one company into more shares of the same company, they'll allow the dividends from all their dividend paying stocks to accumulate until they have sufficient funds to justify the purchase of additional shares of whichever stock (or other investment) that they find most compelling at the time.

A Customized Dividend Reinvestment Program

A customized dividend reinvestment program is just that - reinvesting in a way that's ideal for you.

And the number one thing to keep in mind is that, unless you already have a large income-producing portfolio, the more sources of cash you can generate beyond your regular dividends, the more effective your reinvestment program will be.

I know - that's an incredibly obvious observation. But it bears repeating. The challenge then is to find multiple effective ways to get continuous infusions of cash into your investing account.

Warren Buffett does this masterfully with Berkshire Hathaway's investments. Look at all the sources of new investing income the company is constantly producing:

The float generated by high cash flow insurance operations (e.g. GEICO)
Dividend income from large positions in dividend paying companies (e.g. Coca-Cola, Johnson & Johnson, General Electric, etc.)
Premium income from select put writing strategies
Interest revenue from cash and cash equivalent investments

How many income streams can you count on for your own new investments? For most retail investors, any additional sources of cash infusions will be limited modest dividend income and savings from either a salary or from the profits of a personal business.

The Leveraged Investing Stream

If you spend much time on this site, you'll no doubt come across a lof of references to Leveraged Investing very quickly. Well, here comes another one: Another benefit of Leveraged Investing is that it produces an additional source of investible cash flow for the long term investor.

And, depending on which strategies you use and how you specifically use them, the option premium income (which is designed to lower the cost basis on your long term investments, although you may also view it as a source of perpetual refunds or rebates) usually ends up being a lot more than your dividend income.

Options can be deadly when used aggressively, but when used creatively, intelligently, and carefully, and in conjunction with your long term quality investments, they offer you the potential for dramatically improving your life.

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