Recently we changed from reinvesting dividends to taking dividends in cash. The major reason for this change is the automation we are adding to our trading platform. This will allow us to be much more efficient in the future, which also extends to our dividend reinvestment policy.
We will now be able to rebalance daily, as opposed to monthly. This will allow us to put cash to work much faster and in the appropriate asset classes that are underweight. Tamarac, the software developer, strongly recommends that clients do not reinvest dividends and capital gains but instead pay to cash. The system will look to put the cash to work where it’s needed most (the most underweight securities.) By doing this, we buy up the most underweight positions with cash that is being spun off in the portfolio, essentially reducing the need to rebalance the account as we are constantly addressing underweight securities with cash.
Another advantage is in relation to the wash sale rule. A reinvestment counts as a recent purchase in the eyes of the IRS. Therefore, if you reinvest in a security which you hold at least one lot of that same security at a loss, you cannot sell that security for 30 days. This often times leads to overweight securities being locked up and unable to sell in a rebalance as they are constantly being reinvested in. Paying to cash is the most efficient way to handle capital gains and dividends and it will reduce the need for full rebalances as cash is smoothing out the portfolio deviation.
We will handle these changes for you internally, so there will be nothing to do on your part. Please let us know if you have any further questions about this new policy.