The Curious Investor

Last week we discussed the value of dividends in down markets as well as in stock returns overall. The conclusion was reached that investing in dividend paying stocks offers a terrific balance of income and stability which is important in down markets and has a positive effect on a portfolio in the long term.

For those who are investing with a longer time frame and don’t want to fret with turning over their portfolios, one way to magnify returns from a dividend portfolio is to enroll in a dividend reinvestment plan (DRiP). Basically, this is a program set up by a corporation which issues dividends which allows the cash dividend to be used to purchase shares (fractional or whole) on the dividend pay date. Even better, since these plans allow purchase of stock directly from a company, there are often no commissions.

Why would you want to set up a DRiP? Well, if you were to reinvest dividends from S&P stocks over the last 10 years (7/31/97 - 7/31/07), it would have been worth 4902.43 as opposed to 1455.27. From an initial value of 954.29 in 1997, that would represent a 413.7% gain as opposed to a 52.5% gain. Or, more dramatically, annualized returns of 17.8% as opposed to 4.3%. Obviously, these numbers are a little bit skewed given that dividends inherently improve returns by giving a percentage on top of stock appreciation and, if you had gotten the cash payments, you likely would have reinvested them somewhere. But, with a 17.8% annualized return, this does show you that there are precious few places which allow better investment opportunities than the dividend payers themselves. What’s more, the average dividend in the S&P500 over this time was a mere 1.8-2.0%, a historically low range. For those that want to do their own research all the S&P returns data is available from the Standard & Poor’s website.

Why do you get these outsized returns? Easiest to recognize is the fact that reinvesting dividends allows you to compound returns from both stock appreciation and dividend yield. The other benefit is dollar cost averaging which is the strategy of investing regular amounts on a strict schedule thus allowing you to invest more when prices are low and less when prices are high. The end result, your average purchase cost goes lower and lower over a long period of time which makes your returns look better and better. Add in the cost-savings we mentioned above and an account full of DRiP stocks is a very tempting idea indeed. You should know, however, that since you are now buying and selling shares directly through the corporation rather than your broker, liquidating a DRiP can be more difficult and as a result a DRiP should be looked at as a long term investment and not for money you may need right away. As discussed, the benefits of DRiPs really only manifest over long periods of time anyway so this should not be a concern for people considering a DRiP.

So, how do you get started? If you’re interested in enrolling in a DRiP through stocks you already own, you’ll have to lookup which of them offer DRiPs and get in contact with their agents. A good list can be found here: DripAdvisor A-Z. Usually, you’ll need to have your physical stock certificate which is usually available from your broker for a small fee. Then, the corporation will send you forms necessary for starting the DRiP. If you’d just like to make first purchases of stocks for a DRiP, you can try DirectInvesting.com or the National Association of Investors Corp. both of which charge annual fees but offer quick and simple ways of getting initial shares for a DRiP. The NAIC is particularly interesting as it offers many other very interesting resources to its members and is especially helpful for those in investment clubs. Finally, if this all seems to big a hassle for you, Sharebuilder’s Automatic Investment plan allows DRiP-like investing by giving you the freedom to reinvest dividends, buy partial shares, and invest on a regular schedule for $4 a trade. It also allows this for over 6000 stocks and ETFs, some of which don’t offer DRiPs on their own.

On the Other hand
Choosing a reputed bank like ing bank or bank of america boosts your financial and credit scoring. It not only helps you in avoiding from perils of bad credit cards but also simplifies processes like to apply for credit card and pay back the credit debt. A bank of america card also provides you with additional features and flexibility with strong support and backing of a reputable bank. Same is the case with other popular brands like american express credit card and advanta card.

Bookmark to: