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GOING TO SCHOOL ON DRIPS

By Jim Pearce • October 24, 2024 • Stocks to Watch

Printable PDF

Editor’s Note: I spent last weekend with some friends that I went to high school
with during the 1970s. We spent most of the time reminiscing about the good
times we had back in the day, conveniently overlooking our youthful
indiscretions in favor of our notable accomplishments.

That left plenty of time to talk about what most men our age like to discuss,
which is the stock market. Perhaps we view it as a proxy for competing at sports
or trying to make the honor roll. For some, the thrill of scoring a big gain on
a tech stock is almost as stimulating as scoring the winning touchdown of your
high school homecoming game or getting straight As on your report card.

It doesn’t have to be like that. There are easier ways to make money in the
stock market than guessing which way the winds on Wall Street are going to blow
next. One of my favorite methods for building wealth over time is a Dividend
Reinvestment Plan (DRIP). Many companies with a long history of paying high
dividends offer a DRIP, and here’s what you need to know about them.


WHAT IS A DIVIDEND REINVESTMENT PLAN?

As its name implies, a Dividend Reinvestment Plan allows you to have your
dividends reinvested into more shares of that stock. Some DRIP administrators,
also known as transfer agents, charge a modest one-time fee to get enrolled.
After that, you may not pay another dime when you buy stock in that company
through their DRIP.

In other words, a DRIP cuts out the middleman. This is particularly important if
you are a small investor. After all, if you were making small, regular
investments in several different companies through a broker, the commissions
might cost more than the stock itself. That’s a poor way to save!

Once you are enrolled in a company’s DRIP, you can make additional investments
by remitting funds to the transfer agent. In general, investments can be as
little as $25 to more than $5,000. A growing number of companies will even let
you debit funds automatically from a bank account.


DOLLAR-COST AVERAGING MADE EASY

Because it allows you to invest a fixed dollar amount on a regular basis,
regardless of how many shares those dollars buy, a DRIP is a form of dollar-cost
averaging. It forces you to buy more shares when the price of a stock is low and
fewer shares when it is high.

This makes a lot of sense because the logical time to invest in a company is
when prices are down. Stocks are cyclical: Over time, they go up…then down…and
back up…and so on. Convincing yourself to buy more shares during a down market
is not an easy thing to do. Pessimistic emotions are generally triggered by
lower stock prices.

Those who follow dollar-cost averaging with a well-diversified portfolio should
outperform the overall stock market over the long haul. They will buy more
shares when stocks are at bargain prices. Such a systematic approach to
investing will reward the patient investor.


HOW TO ENROLL IN A DRIP

Enrolling in a DRIP is easy. There are two ways to enroll in most plans:

 1. You can go through a traditional broker and buy the number of shares
    required by the company to qualify as a shareholder. Generally, the number
    is at least a single share of stock. Once you have proof of ownership, you
    contact the company’s transfer agent to request enrollment in the plan.
 2. Some companies also allow you to get enrolled directly through a transfer
    agent. Be aware that most transfer agents charge a small fee for each
    investment through the plan.

For example, energy producer Chevron (NYSE: CVX) offers a DRIP using
Computershare as its transfer agent. Since we first recommended Chevron to our
readers in 1990, it has delivered a total return (share price appreciation plus
dividends paid) of nearly 3,000% through the end of 2023. But without
reinvesting the dividends, the return drops below 800%.




CREATING A DRIP PORTFOLIO

As well as Chevron has performed, we would never suggest using only stock for
this purpose. Fortunately, there are dozens of other companies with comparable
track records you can choose from.

In addition to the energy sector, most companies in the utilities and financials
sectors offer DRIPs. Also, you can enroll in a DRIP for most pass-through
securities including REITs (real estate investment trust), MLPs (master limited
partnership), and BDC (business development companies).

Just remember to always strive for high-quality companies with brand name
recognition that you believe have staying power for the long term. Since you are
not making a lump-sum investment, the timing of your purchase is not as critical
as it otherwise would be.

WATCH THIS VIDEO: Jim Fink Reveals the Keys to Unlocking Wealth

PS: Jim Pearce just imparted some invaluable investment advice, but his article
on DRIPs only scratches the surface of our team’s expertise.

Consider our colleague Jim Fink. He made a fortune for himself trading options.
Now that he’s a millionaire, he’s ready to tell all.

As chief investment strategist of Velocity Trader, Jim Fink has devised a
methodology that generates market-thumping gains…in up or down markets and
regardless of political uncertainty.



One of the most important presidential elections in our lifetime is just around
the corner. Many investors are nervous and hunkering down. But not Jim.

In a new presentation, Jim Fink explains the simple strategy he uses to rake in
gains of 104%, 164%, and 203%…in as little as 72 hours.

Can Jim’s election-year trades really be this profitable? Click here to find
out.


ABOUT THE AUTHOR

Jim Pearce
Bio | Archive

Jim Pearce is the Chief Investment Strategist of Personal Finance, our flagship
publication, and manages two trading services, PF Pro and Mayhem Trader. He
began his career as a stockbroker in 1983 and over the years has managed client
investment portfolios for major banks, brokerage firms, and investment advisors.
Jim earned a BA from The College of William & Mary and the CFP designation from
the College of Financial Planning.

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