Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
More Clarity for the Short Term for Bitcoin Price - 22nd May 18
Study: A Rising and Strong U.S. Dollar Isn’t Consistently Bearish for the Stock Market - 22nd May 18
Gold, Silver & US Dollar Updates with Review of Latest COTS - 22nd May 18
Upside DOW Stock Market Breakout May Be Just the Beginning - 22nd May 18
5 Reasons Why Forex Trading Is Becoming Such A Big Deal In SA - 22nd May 18
Fibonacci And Elliot Wave Predict Stock Market Breakout Highs - 21st May 18
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18
Trump Sounds End Times Armageddon Trumpet for Jerusalem, Israel Evangelical Prophecies - 16th May 18
Our Next Stock Market Dow Fibonacci Price Targets – Get Ready! - 16th May 18
The Coming Copper Crunch - 16th May 18
Stock Futures Are on a Sell Signal - 16th May 18
What to do When the IRS Comes for Your Property - 16th May 18
IS BITCOIN ANONYMOUS? - 16th May 18

Market Oracle FREE Newsletter

Trading Lessons

Ramp Up Your Stocks Portfolio’s Growth with Dividend Reinvestment Plans

Portfolio / Dividends Aug 17, 2010 - 05:55 AM GMT

By: Money_Morning

Portfolio

Best Financial Markets Analysis ArticleLarry D. Spears writes: With interest rates near all-time lows and equity markets in flux for much of the past decade, dividends have become an increasingly attractive feature for stock investors. But, while it's always nice to receive those quarterly checks, dividends do little to help you grow your wealth if all you do is spend the money as it comes in.


If that's your approach, it's regrettable because an array of financial and academic studies have shown that dividends have accounted for more than 60% of total U.S. stock market returns since 1870. In fact, research reported in the book "Triumph of the Optimists: 101 Years of Global Investment Returns" 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.

Fortunately, it's now quite easy to take advantage of the growth potential offered by regular corporate payouts to shareholders, thanks to the proliferation of so-called DRIPs - or dividend-reinvestment plans.

DRIPs are special programs sponsored by corporations that allow shareholders to immediately reinvest their dividend payouts in the company's common stock, usually without brokerage commissions or fees, and often at a discount to the current market price. Most company-sponsored DRIPs have a minimum of just $10 for reinvestment and allow accumulation of fractional shares, meaning even small stockholders can participate.

At last count, more than 1,100 U.S. corporations sponsored their own DRIP programs, including such major names as Goodyear Tire & Rubber Co. (NYSE: GT), Yahoo! Inc. (Nasdaq: YHOO), Texas Instruments Inc. (NYSE: TXN), The Hershey Company (NYSE: HSY) and many others.

In addition, some brokerage firms and numerous DRIP advisory services will 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). (Note: Virtually all regular and many closed-end mutual funds offer automatic dividend-reinvestment plans for their shareholders.)

The major advantage of participating in a DRIP program is that it provides low-cost compounding of your investment dollars. That enables 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.

For a two-scenario example that illustrates this point, check out the accompanying chart. As you can see, by participating in XYZ Corp.'s DRIP, you've accumulated 43.75 additional shares, upping your quarterly payout by more than $15 and lifting the total value of your position by $1,750.08 - even though the stock price ended up exactly unchanged from two years earlier.

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 or full-share purchase.

In addition, most companies with DRIP programs also offer what are known as "direct-stock investment plans" (DSPs). These allow existing shareholders to make purchases of 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 or weekly purchase plans, and telephone redemptions.

(Note: 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 actual 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.

Sounds like a headache - and it is. 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, at its Web site, 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 his or her 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 (also supplies software to help track your investments) - dripwizard.com
•DRIP Central - dripcentral.com
Using a DRIP won't give you the potential for big overnight gains, but with time and compounding, even little DRIPs can grow into a big pool of wealth.

Source : http://moneymorning.com/2010/08/17/dividend-reinvestment-plans/

Money Morning/The Money Map Report

©2010 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 72 hours 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