Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Are Company Sponsored DRIP Plans Viable - 08 Oct 2016 12:38

Tags: drip

There was a time when company sponsored DRIP and Direct Stock Purchase (DSP) plans were the best low cost solution for small investors. But, in today’s low cost trading world it begs the question if these company sponsored plans still have value to the small investor.

When I first started investing in the 1980’s a discount brokerage house would charge commissions that ranged from $35 to $50 a trade and they did not have their own internal DRIP program. But company sponsored DRIP & DSP programs offered a huge discount as they typically did not charge a fee to buy stock and dividends were reinvested for free or at a nominal fee. The only commission charged was when you sold and the commission was around $25 per trade.

By the late 1990’s the internet began to explode. New online discount brokers like E*Trade and Ameritrade began to appear and disrupt the brokerage world by offering commissions below $10 per trade. Some new companies, such as Scottrade, pushed the envelope even further by offering $7 trades. As the popularity of online trading soared, brokerages expanded their services by offering free DRIP programs. By the early to mid-2000’s all of the traditional discount brokerages were online and offering low commission trades and free DRIP programs. The low cost trades and free DRIP programs offered by brokerages today appear to make company sponsored DRIP & DSP plans irrelevant and more expensive but in certain circumstances they still make for a viable alternative to investing.

If you are a dividend income investor, whose income is dependent on dividends, a DRIP is a viable alternative thanks to its flexibility in dividend payments that online brokerages do not offer. With discount brokerage a dividend re-investment is all or nothing, if AT&T pays you a dividend of $50 it reinvests the entire $50 back into full and fractional shares. But, with a company sponsored plan you can direct how many shares you wish to receive in cash and how many to reinvest. This scenario provides income investors with not just an income stream but also the potential for income growth.

Say you own 200 shares of AT&T (T) who pays a quarterly dividend of $.050 which equates to 200 x 0.5 = $100 quarterly dividend payment. In a company sponsored DRIP I can designate 80 shares to be paid in cash and 20 shares to be reinvested so that splits our quarterly payout to $80 in cash and $20 in new stock. Assuming the reinvested shares after a year acquire 2 new shares then our quarterly payment will increase to $41 and continue to grow every year after that. In 15 years you will return to your original $100 cash payment and every year after that your cash payment will continue to grow. Amazing how a small sacrifice up front provides a better long term solution.

Overall I believe company sponsored plans to be a pain in the ass. They nickel and dime you with small fees and you have to manage all of those individual accounts. I get the same functionality from my brokerage and all the paper work is managed under one account. But, I do see the benefit of the partial reinvestment and may use this approach with a handful of companies when I retire, unless my brokerage offers partial reinvestment in the future. - Comments: 0

DRIP Portfolio Update - 13 Dec 2015 23:29

Tags: drip

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The last quarter of 2015 has been a wild ride with the market swinging up and down like a yo-yo making it difficult to figure which prices are really down or up but a couple have been steady to make some changes to my DRIP Portfolio.

Microsoft (MSFT) has long been a favorite of mine. The company announced strong earnings and another great dividend increase causing the stock price to shoot into the mid $50s from the mid to upper $40s. I still love MSFT as a dividend grower but the rise in share price has changed my opinions on the effectiveness of DRIP'g. I believe I can use the cash better towards other values and as such removed the DRIP designation.

Omega Healthcare Investors (OHI) has not been as lucky as MSFT. REIT stocks in general have been under price pressure with a looming Fed rate increase. OHI is down 26% for the year and it had little to do with performance. OHI still continues to execute and increase dividends but if the market wishes to punish OHI then I am obliged to take advantage by adding it to the DRIP Portfolio.

I had high hopes for General Motors (GM) to continue languishing around $30 per share as most investors still have not forgiven them for their bankruptcy. Their most recent earnings increase though is starting to make investors warm up to GM once again and share prices have since increased 10%. As such GM missed the cut for being added to the DRIP portfolio so I'll continue to receive their dividend and invest in other opportunities.

Holding DRIP Start
CMI - Cummins Jun 2015
HCP - HCP, Inc. Jun 2015
MHLD – Maiden Holdings Mar 2015
MSFT - Microsoft removed
PG - Procter & Gamble Aug 2015
QCOM - Qualcomm Mar 2015
THO – Thor Industries Mar 2015
New OHI - Omega Healthcare Investors Dec 2015

DRIP Portfolio Update - 29 Aug 2015 21:40

Tags: drip

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The month of August closed with a market correction and another dividend grower has dropped enough in price to make me change my dividend status to DRIP.

Procter & Gamble (PG) is down 22% YTD. With the dividend yield at 3.7% it became the latest item to be added to my DRIP portfolio. I'm not shocked as I expected volatility as the market moves closer to the possible September Fed interest rate increase.

I still anticipate this list to grow due to volatility and already seeing new candidates with Omega Health (OHI) and General Motors (GM) whose prices have not participated as well as other companies when markets recovered after the correction.

I would also like to take this moment to share some information I learned about my brokerage DRIP policy from Fidelity which I am assuming is similar to other brokerage houses. On the third day of market declines during the correction I had two stocks that DRIP'd. When I calculated the share price they were 10%-12% higher than current prices so I contacted Fidelity who explained the DRIP purchase policy as follows:

With the Fidelity Dividend Reinvestment Plan we identify all customers that will be reinvesting their dividend in the security, and then go to the market to purchase shares three business days prior to the payable date. We purchase as many shares as possible on a best-efforts basis, determine the average share price, and reallocate these shares proportionately to the customers that are reinvesting their dividend. This process typically results in a different reinvestment price than the price that the security is currently trading.

Holding DRIP Start
CMI - Cummins Jun 2015
HCP - HCP, Inc. Jun 2015
MHLD – Maiden Holdings Mar 2015
MSFT - Microsoft Mar 2015
QCOM - Qualcomm Mar 2015
THO – Thor Industries Mar 2015
New PG - Procter & Gamble Aug 2015

DRIP Portfolio Expanded - 07 Jun 2015 12:33

Tags: drip

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Over the last month two more dividend growers have dropped enough in price to make me change my dividend status to DRIP.

Diesel engine maker Cummins (CMI) is down 15% from its 52 week high and down 5% YTD. Healthcare REIT HCP, Inc. (HCP) is hovering near its 52 week low due to multiple concerns with tenets and interest rate increase concerns. Both CMI & HCP have given no cause for alarm that dividends will be halted or decreased or that continued growth will cease.

As the market moves closer to the possible September Fed interest rate increase I anticipate a rotation out of dividend paying stocks by investors putting downward price pressure on shares. I see this as a buying opportunity and will not be shocked if I add more holdings to my DRIP status.

Holding DRIP Start
MHLD – Maiden Holdings Mar 2015
MSFT - Microsoft Mar 2015
QCOM - Qualcomm Mar 2015
THO – Thor Industries Mar 2015
New CMI - Cummins Jun 2015
New HCP - HCP, Inc. Jun 2015

DRIP can be a Strategy Too! - 14 Mar 2015 13:40

Tags: drip

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It is no secret I like all of my dividends to pool into a large amount to help me purchase positions in other companies where I see better growth opportunities or to help diversify my portfolio. But now that my portfolio is fairly diversified (27 positions) I had to rethink my strategy.

Within my portfolio I am seeing value buys in relation to dividend growth & price. When your portfolio positions are telling you there are bargains it makes you stop and think. Since my broker offers a commission free dividend reinvestment program (DRIP) I decided to DRIP some positions.

One might argue I could continue to pool all my dividends and simply increase my position by a larger amount to capitalize but that theory presents two problems for me. The first is that this is not commission free and commissions could eat away at long term gains.

The second problem is portfolio weightings, if I buy larger positions the portfolio will start to become over-weight in just a few positions. This would definitely contradict my risk aversion strategy and is not appealing.

Using a DRIP solves both of my concerns, it allows for commission free purchases and to slowly increase my position all the while still being able to capitalize on the buy opportunity. Of my 27 positions here are the ones I started a DRIP program with:

MHLD – Maiden Holdings
MSFT - Microsoft
QCOM - Qualcomm
THO – Thor Industries

Dividends - DRIP, Hold, or Do Nothing? - 10 Aug 2013 13:57

Tags: drip reinvest

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As a new investor you may be asked by your brokerage if you wish to enroll in a free dividend re-investment program or as it is often referred to as DRIP investing.

A DRIP program is very simple in its nature, when a company issues you a dividend payment your brokerage account will automatically take that payment and buy additional shares of the same company. This concept is often referred to as compounding. Compounding in itself is a powerful savings tool but is it right for your portfolio?

Compounding works best when your investment vehicle has a consistent price. With a money market, savings account or bank C.D. this works very easy. Each unit is valued at $1 so when you reinvest the investment value is always constant at a purchase price of $1.

Dividend yield for stocks are much different. Stock dividend yields are calculated as the dividend payout divided by the price of the stock. Since stock prices are changing daily the dividend yield will fluctuate, the higher the stock price the lower the dividend. When stock prices increase faster than dividend payouts you begin to lose some of your growth momentum and DRIP programs actually hold back your portfolio from peak growth performance as they may be buying when stock price is rapidly increasing. A strategy common among dividend growth investors is to let your dividend payments accumulate and invest when a growth value opportunity presents itself.

Does this mean that DRIP investing has no place in your portfolio? Absolutely not, there are some stock investments where a DRIP works wonderfully if they have what is referred to as a low Beta. Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are scored according to how much their stock price goes up or down in comparison to the market. A stock with small price swings has a low beta (less than 1) and wild price swings have a high beta (greater than 1). Companies that have a beta less than 0.4 typically make for very good DRIP programs. Examples of companies that sport a low Beta are usually utility companies.

So that leaves two reinvestment strategies:

  1. DRIP for companies with a Beta that is less than 0.4
  2. Hold & accumulate for buying opportunities for companies with a Beta greater 0.4

Another topic new investors need to be aware of is whether there is a time when not to reinvest dividends. There are times when you should not reinvest and it will vary by person so I will attempt to address a few:

  • 10% of your portfolio is not in cash – Having a 10% position in cash offers you two significant advantages. First it gives you capital to take advantage of opportunities with a significant position. Second, it provides risk relief in falling markets.
  • Your retired – Dividend payouts may be required to replace income by supplementing Social Security payments.
  • Unemployed – This is similar to being retired where you attempt to replace income loss by supplementing unemployment benefits with your dividend income stream. With a little luck this may hold you over until you get a new job and prevent you from selling any portfolio assets.

I have heard some folks not re-investing on a hunch (or fear) that a stock market crash is imminent. This is often referred to as market timing which is something few people ever get right (including professional investors). My advice is to not worry about market timing and instead focus on your portfolio growth while balancing it for risk through diversification and maintaining a 10% cash balance. - Comments: 0


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