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Accelerate Your Long-Term Wealth Accumulation 01/20/16

Accelerate Your Long-Term Wealth Accumulation With An Ex-Dividend Strategy


The way the year began in the stock market, you’d think the world was coming to an end. On a percentage basis, the first two weeks of trading have been the worst ever for the Dow Jones Industrial Average.

 

No doubt some fine companies are seeing diminishing profits. We might even be at the start of a bear market, which is defined as a decline of 20% or more. But bear markets have happened in the past and the one thing that they have in common is that they come to an end.

 

You might not want to be selling companies that you have been happy to own simply because others are selling them. To paraphrase Rudyard Kipling, the successful investor is the one who can keep his head while all about him are losing theirs. Corporate profits tend to fluctuate and can be under pressure from temporary situations—even just irrational emotional responses of shareholders.

 

The bull market expansion over the past six years has been very enjoyable. But sunny days don’t last forever and at some point the rain must follow. It’s vital for the process. But the markets are reacting as though the dark clouds portend the end of the world. When the pessimists take over, the stock market generally spirals downward. But it’s the optimists who end up making the big money. These are the people who are buying when everyone is selling.

 

That’s not an easy thing to do! And that’s why dollar-cost averaging (and dividend reinvesting) is such an important strategy during turbulent markets. Even if you don’t possess a cool head, this strategy will help you overcome your tendency to overreact to short-term market conditions so you can take advantage of the opportunity provided by those who do lose their heads.

 

As an investor you have to find a way to overcome your natural tendency to over react to the noise—regardless of whether it is optimistic or negative. The objective is to build wealth by logical purchases of high-quality companies at relatively good prices. Dollar cost averaging by its nature does just that. You determine a fixed dollar amount to invest regardless of the market price. When prices are down, you buy more shares, and when they are up, you buy fewer shares.

 

Dividend reinvestment plans (DRIPs) provide an excellent way to dollar-cost average. These plans allow you to invest cash amounts to buy shares directly from the company. You can invest amounts of as little as $25 or $50 (or many thousands of dollars) to buy shares or fractions of shares. With DRIPs it is easy and efficient to make multiple purchases of a company’s stock to accumulate shares over a period of years. Everyone using DRIPs to accumulate shares through dollar-cost averaging can appreciate the joy of watching their share count grow over time as they continually contribute funds. In a volatile market, it is reassuring to know that your cost per share will necessarily be even less than the average price of the shares during the period that you invested.

 

And, your share growth does not come only from investments. Dividends are credited with contributing nearly half (46%) of the total return for the S&P 500 Index between 1989 and 2014. Many DRIP companies have long histories of consistently raising their dividends.

 

To make those dividends work even harder for you, when you are setting up your investing schedule, you should take the company’s ex-dividend date into consideration. You want to own your shares on time for the next dividend payout. It can make a difference in what you will eventually accumulate.

  

While capturing the next dividend may seem like a minor concern. When you consider the implications over the long term, missing out on this strategy means that you lose in two ways:  

 

First, the dividend that you would have earned will not be invested this quarter... and will not compound for the next 20, 30, or however many years you own the stock.  

 

Second, if you set up a quarterly investment program on the wrong schedule, you'll miss out on that "extra" dividend each and every quarter, and each and every one of those "lost" dividends will also fail to compound over the life of your investment.

 

Let’s back up for a minute and define some terms:  

 

What does the Ex-Dividend Date mean?

The Ex-Dividend Date is the day on which all shares bought no longer come with the right to be paid the most recently declared (next paid) dividend. It is important for investors, since you must own a stock before the ex-dividend date in order to receive the next scheduled dividend.

 

The ex-dividend date generally precedes the record date by two business days (to allow time for any transactions to settle).  

 

What does the Record Date mean?

Shareholders whose ownership is properly registered on or before the Record Date will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend.   For DRIP investors, the two key dates to focus on are the Ex-Dividend Date and the last DRIP purchase date (Next Investment Date) prior to the Ex-Dividend Date. 

 

You can quickly get these dates by entering the ticker symbol of your favorite stocks into our handy Ex-Dividend Date Calculator.   

 

For the past several months, we’ve featured companies that tend to raise their dividends on an annual basis. This achievement is testament to the company’s stability and value. And, by making regular quarterly investments into such companies just before the ex-dividend date you will routinely be adding extra amounts that will compound over the long term to enhance your returns.

 

We continue to highlight the benefits provided by companies with lengthy streaks of annual dividend increases, a feature that enhances the compounding achieved by Dividend Reinvestment (DRIPs) and Dollar-Cost Averaging (DCA). There are more than 330 companies that have raised their dividend at least five straight years and offer a company- sponsored DRIP. Owning such companies magnifies returns by using reinvested dividends that are steadily rising to generate dividends on their own.

 

Among the companies that have recently declared a dividend increase are Amgen Inc. (AMGN) (6 years, Ex-Div. 2/12/16), CVS Health Corp. (CVS) (13 years, Ex-Div. 1/20/16), Pentair Ltd. (PNR) (40 years, Ex-Div. 1/27/16), and Wisconsin Energy (WEC) (13 years, Ex-Div. 2/10/16). Buying such stocks just before the Ex-Dividend Date gets the “compounding machine” running as soon as possible, so keeping an eye on the previous year's increase date provides a distinct advantage over other investors.

 

Here's a sampling of candidates that have established a history of steadily rising dividends, have Ex-Dividend Dates coming up in the weeks ahead and offer a No-Fee DRIP:

 

All of these companies do not charge fees for investing (or reinvesting dividends) through their DRIP. No. Yrs=Consecutive years of higher dividends; MR%Inc.=Most Recent Percentage increase; Ann Div=Annual dividend; DGR=Dividend Growth Rate. Here is a complete list of ALL U.S. companies that offer "No Fee DRIPs". Note that it may take several weeks to complete the enrollment in a company's DRIP, so becoming a participant in the plan may mean missing the next dividend, but the important thing to remember is that another dividend is just around the corner, so patience—always important in long-term investing—will pay its own dividend over time.