Replies to post #1223 on Advanced Automatic Investor

[aptus]

Hello Jam,

(1) The recommended way to reinvest dividends is to use the "Add Interest or Dividends" function on the "Cash Reserve" menu.

This will simply add the dividends to the cash reserve for use in subsequent buy recommendations.

(2) Another way to add dividends is to use the "Deposit Cash" function on the "Cash Reserve" menu. This could cause a recommendation to purchase some shares (depending on your configuation settings) with the remainder added to the cash reserve.

The first method is more "Lichello-like" because he ignored dividends. The second method treats dividends as a cash infusion -- which in practice is really what it is.

(3) There is also another line of thinking that says you should use the entire dividend amount to purchase shares. This follows the reasoning that the stock price theoretically falls by the amount of the dividend, so putting the dividend back into shares cancels the dividend transaction.

None of these methods is incorrect, so use the one you like the best.

My recommendation is to use method (1) if the dividend is relatively small compared to your transaction fees. Use methods (2) or (3) if the dividend is relatively large.