Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 19
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 19
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 19
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18
Is the Stock Market Correction Over? - 7th Aug 18
Yield Curve Inversion and the Stock Market - 7th Aug 18
Stock Market Elliott Wave Analysis and Forecast - Video - 7th Aug 18
Trade War! Win the Economic Hostilities Against the Chinese - 7th Aug 18
Technical Analyst Sees Silver as 'Oversold' - 7th Aug 18
Alex Jones Banned! Will Unapproved Opinions Be Censored Off the Internet? - 7th Aug 18
Gold and Silver Stocks On the Verge of the Next Major Decline - 7th Aug 18
First Time Buyers Need to ‘boost the affordability’ of Their Move Alone  - 7th Aug 18
Long Term Care Homes as an Investment are Heating Up! - 7th Aug 18
The Exponential Inflationary Stocks Bull Market - Video - 6th Aug 18
Land Rover Discovery Sport Oil Change Service Dash Warning Message - 6th Aug 18
Restructuring of Western Economic Power - 6th Aug 18
Stock Market Trend and Volatility Analysis - 6th Aug 18
Stock Market and Economy False Narratives That are Just Wrong - 6th Aug 18
VPN – Is It Worth It? - 6th Aug 18
All You Need to Know About Umbrella Companies - 6th Aug 18
Why China Lost the Trade War Before it Even Began - SSEC Stocks Index - Video - 5th Aug 18
Dow Stock Market Elliott Wave Analysis - 5th Aug 18
Iran's Rial Currency Is In A Death Spiral, Again - 5th Aug 18
IMF Produces Another Bogus Venezuela Inflation Forecast - 5th Aug 18
Gold & Silver Precious Metals Monthly Charts - 5th Aug 18
Time to Position for a Decade-Long Bull Market in Natural Resources - 5th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

How to Build a Small Fortune with Dividend Reinvestment Plans

Portfolio / Dividends Apr 30, 2012 - 09:57 AM GMT

By: Money_Morning

Portfolio

Best Financial Markets Analysis ArticleLarry D. Spears writes: The real secret to long-term investing success is income - and with stocks, that means dividends.

Numerous studies, both academic and financial, have found dividends accounted for more than 60% of total U.S. stock market returns since 1870.


More recently, a study by Ned Davis Research covering the period from 1972 through 2008 found that dividend-paying stocks provided an annual return of 7.6% versus a mere 0.2% for non-dividend-paying shares.

What's more, companies with a record of steadily raising their dividends returned an even more impressive 8.6%.

But if you really want to boost your returns, investing in DRIPs - dividend reinvestment plans --is a safe, steady road to building true wealth.

What is a DRIP?
Dividend reinvestment plans, or DRIPs, are special programs sponsored by corporations that allow shareholders to immediately reinvest their dividend payouts back into the company's common stock.<br />
The best part is that it usually can be done without brokerage commissions or fees, and is often at a 3%-5% discount to the current market price. Sometimes that discount is as high as 10%.

Most company-sponsored DRIPs have a minimum of just $10 for reinvestment, and allow accumulation of fractional shares. That means even small stockholders can easily participate in DRIPs.

Some of the leading corporations that sponsor their own DRIP programs include: Caterpillar Inc. (NYSE: CAT), The Coca-Cola Co. (NYSE: KO), Exxon Mobil Corp. (NYSE: XOM), General Electric Co. (NYSE: GE), Goodyear Tire & Rubber Co. (NYSE: GT), The Hershey Company (NYSE: HSY), Texas Instruments Inc. (NYSE: TXN), Yahoo! Inc. (Nasdaq: YHOO) and many others. Roughly 1,125 U.S. stocks offer DRIPs.

In addition, for a modest fee - usually $5 per transaction or less - most brokerage firms and numerous DRIP advisory services can set up and manage dividend-reinvestment plans, known as "synthetic DRIPs," for shareholders of leading companies that don't offer plans of their own, as well as for many of the top exchange-traded funds (ETFs).

What's more, nearly every regular mutual fund offers automatic dividend reinvestment plans for their shareholders.

The Compounding Value of DRIP Investing
The biggest advantage of participating in a DRIP program is that it provides low-cost compounding of your investment dollars, allowing you to accumulate more shares and increase the value of your position at a faster rate-- even when the price of the stock itself doesn't do as well as you might have hoped.

This advantage was clearly spelled out in the book "Triumph of the Optimists: 101 Years of Global Investment Returns," which found that, over the course of the 20th century, a portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains for growth.

For instance, check out the following two scenarios involving the stock of Johnson & Johnson (NYSE: JNJ), which was recently recommended in a Money Morning story on defensive investing.

Johnson & Johnson pays an annual dividend of $2.28 a share, or 57 cents per quarter. In this case, let's assume you start off by buying 200 shares of JNJ stock at $65 per share, or $13,000.
Here's how your JNJ investment could play itself out:

Scenario 1: JNJ Without a DRIP

Over the course of two years, JNJ's stock price could fluctuate but wind up right back where you started, at $65 per share. If so, you would receive $114 per quarter in dividend payments. But without a DRIP you would collect and spend the entire $912, leaving you with no capital gain and a position still worth just $13,000.

Scenario 2: JNJ With a DRIP

However, the results are very different if you decide to enroll in JNJ's dividend reinvestment plan, which allows you to convert each quarterly payment into new shares at the market price, with no commissions and a reinvestment fee of just $1 per transaction. Again, let's assume the stock fluctuates, but winds up right where it started, at $65 per share, after two years.

But, because of the DRIP, the number of shares you hold increases along with the value of your position. It works as follows:

As you can see, by participating in JNJ's DRIP, you've accumulated 14.448 additional shares, upping your quarterly payout by more than $7 and lifting the total value of your position by $939.12 - even though the stock price ended up exactly unchanged from two years earlier.

The Lowdown on DRIPs
Other DRIP advantages include the ability to acquire fractional lots - and even fractional shares - rather than having to wait until you have enough money for a "round lot" (100 shares) or full-share purchase.

In addition, many companies with DRIPs also offer what are known as "direct-stock investment plans" (DSPs). These allow existing shareholders to purchase additional shares directly from the company, in small or large quantities, again without a commission or other fees.

They also provide many ancillary services, such as Individual Retirement Accounts (IRAs), monthly and/or weekly purchase plans and telephone redemptions.

More than 600 companies also offer so-called "no-load" stock plans, which allow you to make your initial share purchase directly from the company, without commissions. However, many of these plans are restricted - often to company customers or residents of the corporation's home state.

Of course, DRIPs also have a few negatives, but these fall mostly into the category of inconveniences rather than threats to your investment success.

For starters, most corporate DRIP plans require you to become a "registered shareholder" rather than a "beneficial shareholder." That simply means you must be a direct owner of the company stock and listed with its transfer agent rather than having your shares held by your broker or other proxy in so-called "street name."

In the past, this meant having to receive and safeguard the actual stock certificates, but today almost all direct ownership is handled via electronic bookkeeping entries, with no certificates needed (unless you want them).

Another irritation is that, even though you don't actually withdraw your quarterly dividend payments, the IRS still requires you to pay taxes on them in the year they are received.

Perhaps the most onerous inconvenience is the need to keep track of the cost basis for each of the many small share purchases you make when you reinvest your dividends. You'll need this information to calculate your capital gains and your tax liability when you eventually sell the shares.

This doesn't sound like a major problem since you only get four dividends a year, but if you use DRIPs on 10 stocks for five years, it adds up to 200 small purchases you'll have to account for when you sell.

You'll also have to make multiple adjustments in the event of stock splits, spin-offs or mergers.

It's a bit of a headache, but the benefits of DRIP investing in terms of growing your wealth far outweigh the inconveniences.

If you want to know whether a company whose stock you already own (or are interested in buying) offers a DRIP plan, you can contact the Shareholder Services or Investor Relations department of the corporation. Numbers and addresses are available in the company's annual reports, on its Website or in the "Profile" section of most online quote-service listings.

They'll be happy to advise you regarding the availability of DRIP, "no-load" or DSP purchase plans and what you need to do to enroll.

If the company itself doesn't sponsor a plan, you can also check with your broker to see if their firm supports a synthetic DRIP program for clients, or you can check with one of the leading DRIP advisory firms, all of which can quickly answer your questions, advise you regarding fees, and help you open an account.

You can get contact information for five of the top DRIP services by clicking on the following links:

•DRIP Investor - dripinvestor.com
•DRIP Advice - dripadvice.com
•Direct Investing - directinvesting.com
•DRIP Wizard- dripwizard.com
•DRIP Central - dripcentral.com

Using a DRIP won't give you any big overnight gains, but it will make time and compounding major allies in your portfolio. And with time and compounding, those little DRIPs can grow into a small fortune.

Source :http://moneymorning.com/2012/04/30/drips-how-to-invest-in-dividend-reinvestment-plans/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules