DRIP Investing

There has never been a better time than right now to buy stocks. I know what you’re thinking — it sounds strange considering the enormous volatility in the market. But, I’m not talking about just any old stocks. I’m talking about stocks that produce real income.

In these manic times, you need to keep one important idea in mind when stock shopping: dividend yields. If there is one proven way to make money during any market condition, it is investing in companies that offer low, growing dividends. In fact, 97% of all gains in the S&P 500 over the last 80 years have come from reinvested dividends, according to one study.

If you are sitting on a huge pile of cash in a nice big home that you own outright, go ahead and reinvest your dividends. But if you worry about your bills, dream about helping your kids out more, or just wish you could eat dinner out a few times a week, those dividends can be the best solution.

Take a step back and analyze the situation. When you invest in a dividend-paying stock, you have the option to put those payments back into more stock or cash those checks to boost your lifestyle.

But there is a third option that most don’t even know about…

DRIPing Money into Your Retirement Savings

Many dividend-paying companies offer Dividend Reinvestment Plans, or DRIPs. These plans allow you to “set it and forget it.” Just buy some shares, set up the plan, and let the company do all the hard work. If all things go well, your money — and your stake in the company — will increase and be waiting for you when you retire.

Most investors, however, have no idea that they are allowed to split their investment. Instead of putting all of your shares in the DRIP, you can actually allocate some to pay you via dividend checks and others reinvested. That gives you both the spending power of dividends now and a savings element to work for you until you need it.

Think it can’t get any better? Well, many companies make their dividend reinvestment plans even more enticing.

Certain companies allow you to both receive dividend checks in the mail and buy more shares for a discount. If you are enrolled in these companies’ DRIPs, your dividends will actually buy you up to 10% more stock every payment.

Matched Gains Without Working a Day for the Company

Here’s how it works:

You want to invest in Company A. That company wants you to reinvest your dividends back into more shares. So, they offer — as a benefit for signing up for their DRIP — a market discount on every purchase. Company A will take your shares and sign you up for this plan. When the dividends come out, they’ll reinvest them by buying more shares for you at a 10% discount to the market price.

It’s as if the company was matching 10% of your investment just like an employer-based 401(k). Here’s the best part: Most companies will let you split your shares into half “pay now” and half “reinvest for later.” So you are collecting current income from half your dividends, while saving for your retirement through an employer-like “matched gains” program with the other half.

From you perspective, it’s exactly like working for the company without ever lifting a finger. You are basically treated as a long-term employee. Better yet, at the end of the day, you still own all of your shares. And shares of companies that offer consistent dividends and DRIPs typically increase in value over a few years. Even in this market.

And you can do this with as many different companies as you want.

There are already over 1,000 dividend reinvestment plans, most of which allow you to split your shares, and a few hundred of these “matched gains” retirement plans. Many more are jumping on this bandwagon.

It benefits you by giving you current income as well as retirement savings, and it benefits them by stabilizing their share prices.

Who Cares What the Shares Cost?

Of course, you don’t have to do any of this. You can simply invest in a dividend payer and just take your paychecks for life. That’s fine. Either way, you’ll certainly ease your stresses and strains while the economy is floundering.

Income investing gives you options like these that “buy low, sell high” strategies don’t. Perhaps most importantly, income investors benefit from a completely different outlook on the market. They are not worried about share prices. They don’t even mind when prices drop. It just allows them buy more stock.

The most important focus for these investors is the dividend. As long as a company pays its dividend, especially if it continues to grow, the investor is usually happy.

Investing like this is much easier than trying to time the market and worrying about the economy. It actually solves both problems. It gives you a two-pronged attack on today’s hectic market.

Jim Nelson
November 17, 2008

The Daily Reckoning