March 19th, 2012 | Forbes
6 Reasons Why You Shouldn’t Reinvest Your Apple Dividends
This morning Apple announced a $2.65 quarterly dividend and $10 billion share buyback plan. Unlike my colleagues William Baldwin and Tom Post, I applaud the maneuver. I don’t own a lot of stocks, but my Apple stock has been a home run and the new dividend payment, while fully taxable, will deposit some useful cash into my Schwab account on a quarterly basis. It also allows me to take some money off the table and accumulate some “dry powder” for future investments.
As a young investor I always thought that dividend reinvesting was the smartest thing to do, however as I gained more years on this beat I began to notice how many veteran investors actually decline to check that box on their accounts that automatically reinvest the proceeds of stock dividends. Most notably if you look at Berkshire Hathaway‘s stock portfolio, you will see that it is jam packed with dividend payers, from IBM and Wells Fargo to Coca-Cola and UPS. As I pointed out a few months ago Warren Buffett is somewhat fixated on buying dividend stocks (see Berkshire Hathaway’s Dividend Obsession). These stocks generate at least $1.4 billion a year in cash for Berkshire Hathaway. Of course, this is in stark contrast to Buffett’s own Berkshire Hathaway, which prefers to buy back its stock rather than share cash directly with loyal shareholders. As Bill Baldwin points out there are important tax advantages inherent with buybacks. If I am not mistaken Buffett almost never reinvests the dividends in the stocks he owns.
Take Berkshire’s ownership in Coca-Cola (KO). If you go back 15 years to 1997 you will find that Berkshire owned the same number of KO shares then as it does now, some 200,000. Yet Coke has been paying a healthy and growing dividend all along. According to one analyst posting on SeekingAlpha, Berkshire has taken out more than $3.2 billion in cash from the dividends Coke has paid since 1997.
Here are some reasons why, like me, you might want to consider NOT reinvesting your Apple dividends:
- You need the cash. This holds true for many retirees. Dividend income streams from stocks can be a great alternative to owning bonds, which do not allow you to reinvest your dividends.
- Not reinvesting your dividends can make figuring out your cost-basis at tax time much easier. Every quarterly dividend reinvestment purchase creates a new tax lot that you need to keep track of so that you can eventually figure out your gains or losses when you sell. Brokerage firms are now required to have systems in place to figure this out for you.
- If you are a value investor or technician you may not agree that the market price in which the dividend stream is reinvested is optimal. Thus, taking cash instead would allow you to better time new stock purchases.
- Taking cash dividends in lieu of reinvesting may make your rebalancing much easier and less costly. It also makes it easier to ensure that you don’t become overexposed to a stock — in this case Apple, which is already up 50% this year alone.
- Dividend reinvesting is often touted as a handy way to dollar-cost average into a stock. However research proves that dollar-cost averaging isn’t all it’s cracked up to be. Its greatest benefit may be that it forces investors to be committed to stocks long term. According to an article by Paul Sullivan that appeared in the New York Times last September, dollar-cost averaging is a bad idea. According to Sullivan, a study by New York money manager Gerstein Fisher proves that lump sum investing performs better the majority of the time. In fact, over a 20-year period, lump sum investing added two percentage points to annual returns.
- The greatest investor who ever lived, Buffett, apparently doesn’t practice dividend reinvestment, so why should you?
[By the way, in the interest of full disclosure, I own Apple stock, have for years and have no intention of selling. I also own lots of Apple products and have convinced many friends to switch to Apple. I will not, however, be reinvesting my Apple dividends.]
As Published On: Forbes