There was a time when I first learned about DRIPs when I had some idea that I would eventually own some shares in every one, or almost every one. Over the years as I’ve learned more about investing in general, I’ve realized that (1) I don’t need a portfolio that big and (2) not all DRIPs are created equal.
(New to DRIPs? Read my guide on How to Get Started in Commission-Free, Fee-Free Stock Investing.)
So what if you’ve done the same and now you’re sitting on a portfolio of 25, 40, 50 DRIP programs? It’s possible. If you’ve got DRIPs that are just hanging around and earning you only $1.00 or so each dividend/distribution date, you should seriously think about what place they have in your portfolio. With only $1.50 every quarter, you’re not going anywhere fast.
So maybe you should sell some DRIPs? Maybe you have too few investment dollars chasing too many DRIP stocks. How do you decide which DRIPs to get rid of?
Withdrawing or Canceling DRIP Shares
First, remember that you have several options when it comes to modifying your DRIP plan. You can:
- withdraw some shares, and deposit them with your broker
- withdraw all shares and cancel DRIP plan, and deposit shares in broker
- withdraw, cancel DRIP plan, deposit in broker AND sell part or all of the stock there
Just because you’re canceling the DRIP plan doesn’t mean you have to sell the stock. So if this isn’t a decision about selling the shares themselves or not, what’s the big deal with canceling the DRIP plan?
Why would anyone want to cancel their DRIP plan?
There are a number of reasons, some having to do with the stock itself, some having more to do with your own investment strategy:
- You’ve decided to focus on fewer DRIPs now that you know the losers/winners
- The company has an uncertain future – a buyout, merger or other action is on the horizon
- Weak economic indicators suggest it might cut or suspend its dividend
- It has already cut/suspended its dividend
- It is growing its dividend too slowly
I used to have a sacrosanct relationship with my DRIPs, ensuring that I’ve never miss out on the compounding effects of dividends reinvested. But then one company suspended its plan. Another company got bought out. Once, I enrolled in a new DRIP just to learn a month later it was merging with another company and I had to redo all the paperwork again. The point is, once you learn that you might have a difficult stock on your hands, just consider pulling out of the DRIP plan and let it sit with your broker.
If you keep the stock with your broker, at least you still collect the dividends while you wait. And if the company merges or gets bought out, your broker can do all the paperwork for you automatically. You could be sailing around the world and not have to deal with it.
There are a few plans that I’m going to be cutting back on this quarter. One is an income trust – and it doesn’t have good dividend growth prospects any longer going forward. Another is just a slow grower. For DRIPs to work best you need the companies that grow quickly and grow their dividends, too. See my picks for the Best Canadian DRIPs for 2010.
There’s another strategy, too. Not long ago I realized it could also make for better diversification if you also start making partial DRIP withdrawals from some of your successful plans so that you can redeploy the cash. You can read about that in my article on Diversifying DRIP Cashflow By Withdrawing Shares.
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