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Robinhood DRIP Problems and What Dividend Investors Should Do

One of the drawbacks to investing with Robinhood for the dividend investor is that they currently (as of Sept 2018) don’t offer automatic DRIP with their positions. A Robinhood DRIP would be a fantastic feature for users– especially considering that many of the investors who use their platform are beginners.

There are many benefits to DRIP that can lead to serious long term gains over the long term. And while Robinhood can be a great place for investors to start (especially because of the no fee commissions), the loss of potential return from no DRIPs on stocks can more than negate this initial benefit.

However, many investors might have accounts with Robinhood already and an outright liquidation into a new brokerage account might not be the best choice. It really depends on the person.

robinhood drip

This blog post will talk about some of the implications for investors considering moving away from Robinhood, or even just getting into DRIP investing in the first place. Hopefully this will give you more clarity and information on what this means for your results and empower you to make the right decision for your finances.

We covered the basics and the pros and cons of the Robinhood platform in episode 39 of The Investing for Beginners Podcast. You can listen to it right here, or read the transcript here.

That discussion spurned additional concerns for a listener who wanted a Robinhood DRIP in place for their current investments. I’ll show case the question and my answer, which can apply to many of you who may be faced with the same problem.

“Hey Andrew,

First off I wanted to say, as so many others have, thank you so much for all your hard work that goes into helping us beginners get a foot in the door of investing. You’ve definitely helped silence a lot of the noise that’s out there in the investing world and by, quite literally, putting your money where your mouth is have made yourself a trust worthy source of information. So thank you!

I was listening to your latest podcast on taxes and different IRA account types and had a few questions for you. So I’ve only recently begun trading stocks and the allure of no minimum account balance coupled with no trading fees, drew me to Robinhood pretty quickly. I know it’s not the best for several reason, as you guys mentioned in the podcast, but it sure is user friendly and has made access to the market incredibly easy (used alongside SeekingAlpha for far better research tools).

But like you guys talked about, without access to DRIP or trading outside the US market, I want to open and trade with a Roth IRA account. However, while I’m still new to the game and not trading with loads of money (just under $1,000 at the moment), would it make more sense to take advantage of the free trading offered by Robinhood to build a solid portfolio and then once I have gained more experience and acquired some strong holdings to then roll that over into a Roth IRA, with say Ally?”

You can. I wouldn’t if it was me.

When you roll over into a new account, you have to sell all of your positions– going to cash, then putting that cash in your new account and then having to buy new stocks. I don’t like it because it cancels out a lot of the point of dividend fortresses (obviously not being able to DRIP).

When you look at some of the best performing stocks over the decades– especially high dividend growers— the best gains were made by holding for the very long term.

When you buy a dividend growing stock but don’t drip, those dividends just sit in your account as cash– earning a 0% return.

With dividend fortresses, I’m hoping to hold them for life. I know that it probably won’t be possible for every single one, but that’s the goal.

Those little $500 here and $500 there are compounding with new dividends each year. If I was in Robinhood and didn’t DRIP, those would be lost years of dividend compounding.

He continues:

“This way I wouldn’t be paying all those trading fees to get to that same point if I just switch over now. Is that allowed? Are there taxes/fees associated with transferring stocks between brokers that would account for the time spent trading with no fees with Robinhood? To me it seems like a no-brainer way to avoid a hefty amount of trading fees while I get my portfolio off the ground, but I also recognize I am a novice by all standards and may be completely wrong with this! Let me know what you think. Thanks so much!

P. S. I just subscribed to your eletter this month and then worked backwards through your previous stock picks to see which, if any, were still relevant to purchase, and from a handful I purchased they’ve already done quite well! So again, thank you for all the work!

Cheers,
Takoda”

Yes you can. As far as I know, you don’t get taxes as long as you are going apples to apples, e.g. Roth to Roth. No extra fees to do this.

I can see the idea if your positions are less than $150 each stock. Then you could be looking at 4, 5, 6% or more just in transaction fees.

Here’s an idea. Maybe split the portfolio into regular position and dividend fortress like I do in the eLetter, but one is Robinhood and one is Ally. That way you can DRIP the dividend fortresses while still trading smaller amounts.

Just understand you’ll be missing out.

I’ve been DRIP-ing on positions since 2014– even regular ones. Yes, I still have positions (one) from 2014 that haven’t hit their trailing stops. I know you’re an eLetter subscriber, so look at my position from April 2015. The one up 200%+.

Since I’ve dripped it, I’ve gotten an extra 0.073 shares. At its current stock price, that’s an extra $15.70. Whereas if there was no DRIP, I’d only have $6.60 in total dividend income up to now.

That’s just in 2.5 years. Imagine the difference in 10, or 20…

Now that’s a bit of an extreme example since the stock has tripled, but still it’s the same concept. And it gets magnified the more money you put in.

Conclusion

As you can see, the opportunity cost from not DRIP-ing on positions becomes greater and greater the longer the investment time horizon. And if you think about it, investing is really a life-long journey, and so our time horizons should probably be much longer than we think.

It’s really too bad there’s no Robinhood DRIP, and it’s something I hope to see changed in the future. In the meantime, we can still make intelligent decisions with our capital and really evaluate what the best route for our money is moving forward.

Hopefully the blog, podcast and other resources I share help point you into that most optimal path for the biggest and greatest gains.

At the end of the day you can’t guarantee your results with anything when it comes to investing. The one thing you can ABSOLUTELY control is your willingness and desire to learn as much as you can about it. Robinhood is another brokerage option that works for some and doesn’t for others. It’s up to you to decide, and you alone.