Saturday, July 28, 2018

Robinhood does not need Drip

DRIP stands for Dividend Reinvestment Program. I'll explain what this is through an example. Apple stock paid a dividend of $1.46 on May 17th, 2018. If I was enrolled in DRIP, this $1.46 would have bought $1.46 worth of Apple stock. On May 17th, 2018, Apple stock closed at $186.99.

$1.46 - dividend / $186.99 stock price = $1.46/$186.99 = 0.0078. If I had 1 share of Apple, I would now have 1.0078 shares of Apple. 

In August, Apple will probably pay another $1.46 dividend. That $1.46 is per share, and through DRIP I have a tiny amount over 1 share. So in August, I'll get 1.0078 x $1.46, which is $1.47. If I am I still enrolled in DRIP, then - 

$1.47 - dividend / $190.00 stock price (just guessing) = $1.47/ $190.00 = 0.0077. I would now have 1.016 shares of Apple. 

If you keep this going, you get more fractional shares of Apple, and after a long time, you'll reach two shares of Apple. This is compound investing/growth on it's own, and you don't need to do anything for it. 

A lot of people want DRIP enabled on Robinhood, and I don't think it is needed, and here's why - 
  1. DRIP will hurt Robinhood's revenue. Robinhood uses the money sitting in our accounts to make money just like a bank does. I love Robinhood, and the app is free, so let them make money. If Robinhood doesn't make money, we have to go back to paying commission on trades. 
  2. You don't get to choose the reinvestment price. DRIP happens on it's own, and you don't decide what price the dividends are reinvested at. The day that the dividends are reinvested, the price of the stock could be high, therefore buying fewer fractional shares. 
  3. Robinhood is so easy to use and check, I'd rather take me dividends and decide which stock I'm going to buy next, and at what price. I'm still reinvesting my dividends, just at a time/place that I decide on. Robinhood isn't the platform to just "set and forget".
I realize investors with smaller accounts could benefit from this, but I think they'll benefit more from not having to pay commission fees. If Robinhood doesn't make money off of the money available in our accounts, they'd have to probably charge for something, and the app wouldn't be free. 

Those are my thoughts, and I'd like to hear yours!

Thanks for reading.

Signed,

Mitch

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Thanks for your thoughts!