Many dividend investors love themselves some dividend reinvestment action, putting their recently acquired income back to work in the same stock. Most online brokerages will set these up for you in about eight hot seconds.

The reasoning is pretty simple. If you find a stock you want to own over the long-term, then why not take the guesswork out of the investing decision and dollar cost average yourself an even bigger position over time? Then you can sit back, relax, and do whatever it is lame-os (lame-oes?) do with their time. Play Scrabble or something.

Your humble (and handsome!) author chooses not to do this, for a few different reasons. I like using my dividends to further diversify rather than using them to mindlessly buy the same company. I’d rather put those dividends to work in something I view as undervalued. And, to the frank, I’m not sure I’m smart enough to DRIP my income, especially in something that’s a full position. My luck I’ll buy some stock, reinvest my dividends, and watch the whole thing go down the toilet. That would be bad.

An actual example? Don’t mind if I do

A couple of years ago I recommended Altagas (TSX:ALA) as a stock you could own rather than bitching about the utility company.

It was in the middle of a big acquisition, paying $8.4 billion to buy Washington-based WGL Holdings. The deal would see Altagas issue a lot of shares and take on a big chunk of WGL’s debt, but management was bullish enough to predict dividend increases of 8-10% annually through 2021 once the deal closed.

Things did not turn out so well. Investors hated the amount of debt taken on, and Altagas was forced to sell a lot of good assets to help pay for the deal. WGL has a lot of expensive growth projects that needed to be funded, which will further stretch the balance sheet. Initial results from the two combined companies have been lackluster as well.

It became obvious the company was going to cut the dividend, a fate that was made official in early December. The payout was cut 58% and will now be $0.08 per month, or $0.96 annually.

Altagas shares sunk from over $30 each before the WGL mess to a low of just over $10. They’re currently sitting at just over $13 each, which is a devastating loss of wealth for a boring utility stock. This stock is more disappointing than my career path, at least according to my Grandma. YOU COULDA BEEN A DOCTOR.

Here’s the carnage in graph form. TRIGGER WARNING.

Luckily I avoided the whole fiasco, but maybe not for long. I really like the stock today. It trades for about 4x 2019’s expected funds from operations and comfortably under book value. The dividend (which will be about 30% of FFO) is still like 7%, and the cut will allow it to slowly get the balance sheet back into better shape. I think the stock could easily double in five years.

Altagas’s historical performance

Getting back to the historical performance, let’s take a closer look at owning Altagas and simply collecting the dividends versus a little dividend reinvestment action back to work in more Altagas shares.

As you can see, Altagas was a very good investment at one point.

You can also see just how much more money you’d have over a 14.65 year period if you would have taken your dividends and put them into a different company. All those shares purchased at reasonable valuations on the way up would be underwater today.

An investment that didn’t reinvest dividends would have eked out a 2.84% annual return. That’s not great, but it’s not a disaster either. And it’s more than double the 1.23% return you would have gotten reinvesting dividends. The total return numbers are even more striking; you’re looking at a 51% total return versus 20%.

Let’s wrap it up

Dividend reinvestment plans are perfectly fine. I just choose not to participate. I’d rather take my dividends and put them to work in another undervalued security.

And remember, you don’t need to automatically buy the same stock to get the reinvestment magic. You get the same compounding effect no matter what investment that capital makes.

Tell everyone, yo!