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Enhanced Compounding with DRIPs 02/03/15

Enhanced Compounding with DRIPs

One thing that many investors understand is that “the miracle of compounding” plays a major role in Total Return, especially when combined with the advantage of time. Much of that compounding comes from dividends, which provide a steady flow of additional cash that can be reinvested in more shares of stock. That's where company-sponsored Direct Investment (or Dividend Reinvestment) Plans come into play.

 

Once an investor is enrolled in a DRIP, subsequent dividends are automatically used to purchase more shares (and fractions) so that every penny of the payout is used to create a growing stake in the underlying company. (Keep in mind that dividends are taxed at favorable rates, whether received or reinvested.) But there are at least two things that can give DRIP investments an extra boost: Owning companies that consistently raise their dividends every year and Buying additional shares just before the Ex-Dividend Date.

 

Currently, there are more than 600 companies that have raised their dividend for at least five consecutive years, and almost half of them offer company-sponsored DRIPs (which offer not only the ability to reinvest dividends, but also the option to buy additional shares directly). Owning such companies gives shareholders a second level of compounding by reinvesting dividends that are steadily rising. And remember that the new shares and fractions that are added each quarter generate their own (rising) dividends.

 

The second enhancement - the ability to directly purchase new shares just before the Ex-Dividend Date - is a simple refinement of the plans' cash purchasing feature, which often allows purchasing as often as weekly, as well as the ability (for most plans) to set up automatic monthly or quarterly bank drafts. By purchasing just before the Ex-Dividend Date, the shareholder's new shares qualify for the next dividend that will be paid, usually about a month later (rather than waiting a full 90 days between quarterly payments).

 

Here's a sample of the companies that have recently declared a dividend increase, including the number of consecutive years the company has raised its dividend rate:

 


 

No.Yrs=Consecutive years of higher dividends;

MR=Most Recent Percentage Increase;

DGR=Dividend Growth Rate;

 

Company-sponsored Dividend Reinvestment/Stock Purchase Plan (Y/N=Fees? For Dividend Reinvestment (DR) or Stock Purchase (SP)

 

For a list of No-fee company-sponsored DRIPs, click here: http://www.directinvesting.com/search/no_fees_list.cfm

 

Note that we have excluded yields of less than 2%. Also note that we have excluded most-recent-increases of less than 2%, which we consider inferior.

 

Also note that Ex-Dividend Dates generally recur every three months, so, for example, a company with an Ex-Dividend Date of March 15 would also have Ex-Dividend Dates around the 15th of June, September, and December - an important cycle for anyone trying to add DRIP shares just prior to the quarterly cut-off.

 


 

Another useful “tweak” to the strategy is to anticipate companies that are about to increase their dividend rates. Since these firms typically do so about the same time each year, being aware of that history can help to anticipate the next increase. Here's a sampling of candidates for that distinction:

 

No.Yrs=Consecutive years of higher dividends;

MR=Most Recent Percentage Increase;

DGR=Dividend Growth Rate;

 

Company-sponsored Dividend Reinvestment/Stock Purchase Plan (Y/N=Fees? For Dividend Reinvestment (DR) or Stock Purchase (SP)

 

For a list of No-fee company-sponsored DRIPs, click here: http://www.directinvesting.com/search/no_fees_list.cfm

 

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.

 

If you wish to take advantage of the opportunity to make regular investments of amounts of as little as $25, you should be careful to choose companies such as Pfizer, 3M, Owens & Minor, Piedmont Natural Gas, Raytheon, General Mills, Norfolk Southern--to name just a few of the well-known companies that qualify and don’t charge fees.