Get Rich at a Medium Pace

The great Ben Franklin once said, “Money makes money. And the money that money makes, makes more money.”

This is the essence of a dividend reinvestment program (DRIP). When you own a stock that pays high dividends and reinvest them into more shares of that company, you’re compounding.

Eventually the additional shares earned through dividend repurchase surpass the original stake. In essence, the dividends create dividends, which create more dividends. Over long periods capital can be grown exponentially.

This is an incredibly powerful force which all investors should take advantage of.

Juicy Tobacco Dividends

The S&P 500 currently offers a pitifully low 1.2% dividend yield, so in order to find good DRIP stocks, it’s necessary to get a little creative. Challenge accepted.

Some of the highest-dividend paying companies in the U.S. today are tobacco firms. Altria (MO) is a personal favorite which we have covered previously. The company owns classic tobacco brands including Marlboro, Skoal, Copenhagen, and Black and Mild. They also own on! nicotine pouches and the NJOY nicotine vaporizer brand.

Altria is famous for paying out big dividends from its impressive cash flow. Today the company pays a roughly 7% dividend.

If you had purchased Altria shares in January of 2000, you would have paid about $22 per share. Today the company trades at around $58/share, so the price has risen by about 2.5x over 25 years.

BUT… if you had reinvested the quarterly dividends into more shares of Altria, an initial $10,000 stake in 2000 would be worth $472,000 today according to this DRIP calculator tool.

If the investment was in a taxable account, investors would have had to pay taxes on those dividends, so we need to take that into account. DRIPs work best in tax-sheltered accounts like IRAs and 401Ks.

No matter how you cut it, though, it’s an extremely attractive return on investment.

In June of 2022 I began my own Altria DRIP compounding experiment, purchasing 200 shares of Altria (MO) at around $42/share.

My stake has already grown into 251 shares in less than 3 years. DRIPs really get going after year 10, but it’s impressive to see a 25% growth in shares owned after just 36 months. A full 25% of my dividend yield is now coming from past dividends! In another 15 years the results should be excellent.

In the far future, tobacco companies may eventually go the way of the dinosaur. But it will almost certainly take much longer than most people expect.

Today these companies’ product lines are shifting into less harmful nicotine products such as vaporizers and pouches. And it doesn’t seem like the world’s demand for nicotine is going away anytime soon. Smokers gonna smoke.

Profit margins remain high and tobacco will remain an attractive sector for the foreseeable future. The fact that self-righteous ESG investors avoid it makes it even more tempting.

(Note: Altria shares have risen significantly since we last covered the stock, so it probably makes sense to wait for a pullback.)

The Incredible Power of DRIPs

My best DRIP investment in terms of ROI was Collector’s Universe (CLCT), a stock which was acquired by Steven Cohen in 2020. The company was small when I first purchased in August of 2013, trading for about $14.40 per share with a 6% dividend yield.

I bought just 110 shares and held for 7 years, until the company was bought out. Over that time the dividend compounded into 161 shares and the share price grew to more than $75. My initial investment of about $1,440 turned into more than $12,300.

And because it was in a Roth IRA, the gains were sheltered from taxes. Unfortunately I didn’t buy many shares, but it still turned into a great ROI.

This example shows the power of DRIPS and compounding in action.

Compounders Going Forward

Today my favorite compounding opportunities are Brazilian stocks. Petrobras, the Brazilian oil company which we covered earlier this week, offers a yield of approximately 13%.

For now, Petrobras’ dividend appears to be safe, but it could be lowered or even paused if oil prices fall further. I bought this one recently and plan to add on any major pullbacks.

The iShares Brazil ETF (EWZ) as a whole has a healthy 7% yield. And unless commodity prices fall apart, those yields should be sustainable. And on the flipside, if commodity and oil prices rise significantly, the upside will be stellar.

Be sure to read our past coverage on Brazil if you haven’t yet. This is the most attractive dividend reinvestment opportunity I see on the market today. It’s an emerging market, so is a high-risk, high-reward opportunity.

Given the chance to compound a 7%+ yield for 10+ years, however, it’s a risk worth taking. I’ve invested north of $100k in Brazilian stocks (specifically EWZ, VALE, PBR.A, and NU) over the past 3 months, with plans to invest more over the next year.

We’ll be on the lookout for more compounder/DRIP opportunities and will report back when we find them.

I hope you’re all having a nice weekend.