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I used to think DRIP was something only plumbers worried about. Then I started investing.
Dividend ReInvestment Plans — DRIPs — are a favorite tool among long-term investors. “Always reinvest your dividends,” the logic goes. “Compounding is king.”
For a long time, I agreed completely — and I still do for people who are in the wealth-building stage of life.
But at some point, I stopped using DRIP entirely. Today, every dividend my portfolio generates goes into cash instead of back into the market.
That wasn’t a reaction to fear or market timing. It was a deliberate decision shaped by age, income planning, and risk management.
DRIP Works — Until Your Goals Change
In the accumulation years — when you’re working, saving, and building — DRIP is hard to beat. Reinvesting dividends means:
The formula is powerful: Earlier reinvestment = more shares = more growth.
For younger investors, DRIP is usually the cleanest, simplest, and most effective strategy available.
But the Question Eventually Changes
Eventually, the investing question stops being: “How fast can I grow my portfolio?” and becomes: “How smoothly can I live off this portfolio?”
That shift changes everything. Growth remains important — but stability, cash flow, and control rise to the top. That’s when I turned DRIP off.
Why I Route Dividends to Cash
Today, my dividends all flow into a cash account. I don’t treat that cash as idle money — I treat it as a working tool.
Dividends now serve multiple purposes:
1. Rebalancing Discipline
Rather than automatically reinvesting into whatever stock or ETF paid the dividend, I pool all the cash and periodically invest into whichever part of the portfolio is underweight.
This avoids:
Dividend cash becomes forced “buy low” capital.
2. Volatility Management
In drawdown years, forced selling hurts.
A cash dividend stream:
Having steady dividend cash increases psychological comfort as much as financial stability.
3. RMD Readiness
Once Required Minimum Distributions (RMDs) enter the picture, the portfolio changes roles. Part of your nest egg becomes an income generator rather than a growth engine.
Dividend cash:
4. Withdrawal Simplicity
When income is needed — gifts, expenses, taxes, generosity — I use dividend cash first. That avoids untimely sells and makes budgeting simpler: Income comes from income; assets stay invested.
But Doesn’t DRIP Earn More? Yes — in pure long-run math, DRIP usually wins. Studies suggest reinvesting dividends may outperform by about 0.1%–0.4% per year.
But for someone in the spending phase, absolute return isn’t the only metric that matters. Risk management matters. – Cash-flow stability matters. – Behavior matters.
Dividend-to-cash produces nearly identical long-term outcomes — while offering much greater control during retirement and withdrawal years.
Age Matters
Dividend strategy should follow life stage.
Under 45
DRIP is king. Your priority is growth — not cash flow.
45–60
This becomes a gray zone. Some investors still lean fully into DRIP. Others begin collecting income for emerging needs. Both approaches can work.
60+
Now withdrawals become real. Stability matters more than squeezing out the last few basis points of growth. Cash dividends become not a drag — but a feature.
Does Account Type Matter?
Inside Retirement Accounts
There is no tax cost either way.
Choosing cash over DRIP is purely a decision about:
In Taxable Accounts
Dividends are taxed whether reinvested or not — so DRIP doesn’t shield you from the IRS.
Collecting dividends as cash can actually be more efficient, allowing you to:
My System Today
Right now:
This setup:
Most importantly: It fits where I am in life.
The Real Lesson
DRIP isn’t a lifetime commandment. It’s a tool — and tools change with the job at hand.
When you’re building wealth: Reinvest everything.
When you’re living off wealth: Use dividends as income and control capital.
So… You DRIP?
Good — if you’re still building the tower.
But when the time comes to live in it: Turning off DRIP might be the smartest upgrade you’ll ever make.
Before the start of low-cost index funds in the mid-1970s driven by John Bogle at Vanguard, Dividend Reinvestment Plans (DRIPs) were a popular and inexpensive method for individual investors to build wealth where your first purchase was often a single share and then you could buy additional shares with a low dollar amount. My memory is that approximately 200 publicly traded companies had DRIP investment plans. Pre-internet everything was paper based and USPS was the medium of communication between investor and typically a single broker that the company being invested in would choose.
Companies seemed to like drip’s because the investors were typically long term and seemed to add stability to the turn over ratio as drip investors tended to never sell their shares. This was a time when some stock brokers would trade often. Typically share price was at the daily closing net asset value (NAV) on the day of purchase. Some companies we invested in even had a discount (from NAV) for buying shares in their DRIP.
Decades ago I was a volunteer club treasurer for a small drip only investor club of about 20 members and when I tired of the bookkeeping for the club we dissolved the investment partnership. Unsurprisingly, no one else wanted the treasurer position. We had small taxable gains every year but we more than spent any gains at the fun investor club meetings we had. Our investment club was a subset of a group of good people originally known to each other by membership in a community service organization. I learned a lot about wanting simplicity in my investing life from my experience with the club.
I believe I’ve posted something similar before, but my strategy has been this:
So far, so good.
Good post. I do agree with Kathy that whether one reinvests dividends or not is probably more a function of cash flow needs than age. It also may be different in different accounts based on time horizons.
In our case….
In taxable accounts, most dividends are paid to cash, except for a couple of holdings where I have them reinvesting.
In tIRAs, stock fund dividends are automatically invested in a bond fund. (We’re not yet taking RMDs.)
In Roth IRAs, stock fund dividends are reinvested.
In 401(k), reinvesting as that’s the only option besides having them paid out as distributions.
This is less an issue of age and more an issue of how much of your portfolio (if any) you need to spend. I am 78, but I am spending right at 1% of my portfolio this year. I have yet to spend any of my RMDs, I simply move the money from my IRA to taxable, rebalancing if necessary on the way. I still have reinvestment turned on for all of my funds. I will start thinking about turning it off when/if I get to a 3% spend.
If you are still reinvesting, are you selling stock for RMDs or did you already have cash accumulated for that purpose?
AS I wrote: “I simply move the money from my IRA to taxable, rebalancing if necessary on the way”. I have stock funds in both places. There is no reason to hold cash in an IRA, although holding bonds in an IRA rather than taxable would improve the tax situation. See also JoBo’s post below. And yes, I have taxes withheld if necessary.
Holding cash in the IRA rather than taxable can also improve the tax situation.
I prefer to have it where I can easily transfer it to my checking account. Admittedly it is a bit more of an issue now, but until recently it wasn’t generating enough interest to notice.
I agree, William, with your thoughts about DRIP except regarding RMDs. So often I read that taking cash out of retirement accounts is necessary to satisfy RMDs, even if that cash will subsequently be reinvested in a taxable account. Transferring out invested assets without selling is instead entirely possible. No “need to pull principal from investments at poor times”, rather, just have the investments transfered out in kind.
Transfers in kind are helping me transition my tax sheltered accounts from stocks to fixed income. As I am now past the need for growing my retirement accounts, keeping fixed income tax sheltered accomplishes two things. For one, it makes upcoming RMDs more predictable, and for another, it is more tax efficient, as interest is no longer taxable income.
How do you pay the taxes on the RMD transfers made in kind? I assume there is no withholding then or is there?
At Fidelity, I could elect withholding by selling shares. Indeed, that is Fidelity’s default option. Instead, I pay estimated taxes either directly to the IRS, or through withdrawals from a 403(b) account that is all fixed income. Though it may sound complicated, in practice it’s easy (TIAA allows up to 100% of a withdrawal to go federal and state withholding). I’m five years away from RMDs in the TIAA account, but must take them in an inherited account.
Good article. I turned off DRIP on my taxable account about 10 years ago to offset the equity growth in my portfolio. The cash goes into fixed income and keeps me closer to my 60/40 target. I’m 68 so a few years away from RMDs but you have a good thought on using the dividends in my IRA to fund them.
I used DRIP with two stocks, one since I was 18, the only individual stocks I own.
I only stopped a week ago – age 82 – because I reached my goal on total shares accumulated and I wanted to build up cash as Connie is again hinting at a new kitchen.
Neither stock is in a qualified plan.
At some point those dividends may come in handy a revenue stream. The companies have been paying dividends for 125 years.
Just yesterday as a result of your post I changed my reinvest settings to cash in my traditional IRA. I realized that this is a way that I can free up cash as I progress through my retirement journey.
Previously I had been tapping into some inherited IRAs to fund our retirement expenses but these will be emptied earlier next year and my traditional IRA will be the primary source of our income along with a small pension. Additional cash (up to one year of expenses) will come from quarterly rebalancing.
In preparations for utilizing QCD’s from my tIRA in 16 months (at 701/2), and RMDs (at 73) I have begun directing all my bond fund’s dividends and stock fund dividend/capital gains to my “core holding” (SPAXX) in that account. My intention is to always have the needed cash on hand in my tIRA to meet my more immediate QCD needs, and later RMD requirements, without ever having to decide what and how much to sell a position. If I find I am overshooting my annual needs I can always turn on some of the DRIPs.
Exactly what we do. You can avoid selling when you rather not do it.
Great post, William. I had several retired tax clients who relied heavily on income from dividends. Being qualified dividends, they were easy on their taxes as well.
Really excellent post, thank you for sharing this perspective! I currently use DRIP on some individual stocks and have 20% of my equity portfolio in dividend funds with reinvestment turned on. You’ve definitely given me food for thought.
👍 thanks.
Very cogent reasoning! Though I never got around to setting up DRIPs with particular stocks, I have very recently been directing about half my dividends and capital gains to cash, for the strategic reasons you cover in your excellent post.
Thank you!