| Grow
Wealthy DRIP by DRIP |
Published: March 23, 2006
The choice is yours . . .
You
can pocket your dividend payments or plow them back into shares of a
company through its Dividend Reinvestment Plan (DRIP). If you choose to
let your dividends grow drip by drip, then over time you'll be amazed at
how much wealth you can build for yourself. Money doesn't grow on trees,
but it sure does grow in a Dividend Reinvestment Plan.
The Magic of Compounding
What's the key to growing your wealth? The answer is simple: the magic
of compounding.
It's easy to see how
compounding builds wealth over time. Think about your bank savings
account. Say you earn 4% interest on an account balance of $10,000. At
the end of the first year, you'll have $10,400 in that account. If you
earn another 4% interest on that amount the following year, you'll then
have $10,816. In 15 years, you would have accumulated $18,009,
increasing your investment by more than +80% -- for doing absolutely
nothing!
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DRIP plans work exactly the
same way. In fact, they're even better than savings accounts because the
yields you can earn are usually much higher. For example, one of my
current portfolio holdings -- American Capital Strategies (ACAS)
-- is now yielding about 9% based on a projected dividend payment of
$3.20 this year.
Let's assume you own 1,000
shares of ACAS and that you purchased those shares at an average price
of $35 per share. By simply reinvesting your dividend in the company's
DRIP plan, in 15 years you would own 3,642 shares. Assuming the firm's
share price stays the same, your original $35,000 investment in ACAS
would now be worth $127,487! Better yet, you'd be earning nearly $11,500
in annual dividend income from that one investment alone.
And this example assumes the
firm's share price doesn't budge an inch over the entire 15-year period.
Those projected gains are from dividends only.
However, let's now assume that
shares of ACAS appreciate at the slow and steady pace of +5% a year over
the next 15 years. That's a safe assumption since, in fact, the shares
have gained an average of +23% every year since September 1997.
If you didn't reinvest your
dividends, then you'd end up with $144,134 at the end of 15 years.
That's nice, but you'd do even better if you let your dividends
compound. By enrolling your shares in a DRIP plan, you'd end up with
3,642 shares worth $265,036 -- considerably more than your original
$35,000 investment!
The point is that dividends
matter. And reinvesting dividends paid by high-yield securities matters
even more. Dividend reinvestment is one of the safest, surest ways to
build wealth in your income portfolio.
Getting Started
Getting started in a dividend reinvestment plan is easy. If you already
own just one share of a particular company, then all you need to do is
call the toll-free phone number of the firm's investor relations
department (this is usually listed on each company's website). Tell them
you want to sign up for the company's dividend reinvestment plan.
Instead of receiving a monthly or quarterly dividend check, your account
will automatically be credited for a fraction of the shares covered by
the dividend payment. For instance, a $1.00 dividend payment will buy
you a quarter of a share of a $4.00 stock. The gains may seem small at
first, but over time the number of shares that build in your account may
surprise you.
Read the Fine Print
Thanks to their growing popularity, some 10% of U.S.-traded stocks now
offer DRIP plans. These plans differ from company to company, so it pays
to read the fine print. Some let you automatically reinvest your
dividends without charge, but others charge a transaction fee. Some let
you reinvest your dividends at below-market share prices, some let you
buy additional shares directly from the company without going through a
broker, and some let you set up regular automatic deductions from your
bank account.
You can also reinvest the dividends yourself. Most brokerages will let
you automatically reinvest your dividends at little or no cost. For
example, if you trade through a Charles Schwab account, then you simply
need to check the "Dividend Reinvestment" box when you put in
your order. Ameritrade, E*Trade and TD Waterhouse are equally
user-friendly and don't charge for this service.
Information on individual DRIP plans is sometimes hard to
come by, in part because the Securities and Exchange Commission (SEC)
doesn't allow companies to promote their DRIPs, except to existing
investors. Also, since these plans don't generate big commissions for
brokers or fund managers, you'll need to do some digging. You can
usually find the information you need on each company's
website, but the research can be very time-consuming.
Quality Stocks with DRIPs
To assist you in the search for quality DRIPs, I recently searched for the highest yielding stocks with the safest dividends that
also offer DRIPs. For your convenience, I've also included telephone
numbers so you can call each company directly to find out the specifics
of its DRIP.
To find these gems, I passed over any stocks that didn't meet the
following strict
criteria:
-- Dividend yield of at least 5%
-- Solid dividend growth record
-- Strong cash flows to support its dividend payments
-- Positive earnings outlook in the years ahead
The following eight companies passed each and every one of these tests . . .
Important
Note: Throughout the remainder of this article, editor
Carla Pasternak provides an analysis of eight high-yielding income stocks with dividend yields of
around 6-7% that also offer dividend reinvestment plans (DRIPs) to their shareholders. However, in order to view the
remainder of this article, you'll need to subscribe to our premium
income-oriented newsletter -- High-Yield Investing. After
you subscribe you'll receive immediate access to the remainder of this
article, as well as our monthly High-Yield Investing
newsletter and a host of additional premium content. Please visit one of
the following links to continue . . .
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
