Quote:
Originally Posted by Tidybuoy
Someone told me that I should be reinvesting thru a DRIP program because when they distribute shares, they are diluting the overall stock and therefore I would always be getting more shares due to the diluted price.
Thanks,
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I don't understand that statement. It makes no sense. That person doesn't understand what they are claiming - or maybe didn't explain it well.
I
think what that implies is that if everything about the company and financial results is static, upon issuing dividends and then DRIP participants use it to buy the stock, the number of shares continues to increase. As the number of shares increase - again with no change in financials, the stock is diluted and the price drops and each dividend payout you are buying more shares.
But that also means that the dividends you bought previously are worth less. Which is NOT what you want to happen.
In the real world, the company becomes more profitable, the stock goes up, and the previously purchased shares from way back that were bought at very low prices are worth more.
I've got a DRIP stock that in 1992 we initially invested $500 which bought 9.5 shares. We have not put in another single dollar - but DRIP'd since. Last dividend was in May and paid out $79. Our current holdings are close to 80 shares worth over $13k - which has averaged at 8% return. Not fantastic - but not bad. It's a very small portion of our portfolio.