There are very few easy ways to increase return on a stock portfolio. However, one very simple enrolment process, could help the average stock market investor get more bang for their buck. DRIPS are an excellent way to leverage the dividends received from holding a stock .
DRIP stands for “dividend reinvestment plan”. A DRIP will automatically take the money you receive as a dividend from a company, and buy an equal value of shares of the same company, for you. In short, you get shares of stock in a company, instead of cash as a dividend. Most mid to large cap companies offer the plans. Usually, commissions are waved.
Getting started is simple. Your broker probably has a section on their website.
DRIPS are ideal for someone that buys high yielding stocks, for the long term. An investor will accumulate shares in the company over time. Think of it like dollar cost averaging into a stock, without having to pay commissions and decide when to purchase. Ideally, as the stock appreciates in price, the dividends reinvested becomes more valuable. DRIPS can supercharge the yield on an equity investment.
A classic example of a stock, with a high dividend, that has appreciated over the last few years, is Johnson and Johnson. Consider someone that bought 100 shares of Johnson and Johnson five years ago, and enrolled in it’s DRIP. Back then, it was trading at $65 a share.
The chart below shows the Johnson and Johnson dividends paid out over the last five years, and how the share amount would increase, it they were invested back into the stock:
|Date Paid||Dividend Rate||Price||Resulting Shares|
Johnson and Johnson closed at 117.20 on February 15th, 2017. The investor that enrolled in a DRIP plan realized a 109% return over the time frame ((116.233*117.2-100*65/(100*65)). An investor that did not enroll in a DRIP plan, would have received $1,385 in dividends. So their return comes to 101% (11,720+1,385 -6,500)/6,500. Pretty good. However, simply by enrolling in a DRIP plan, the return is increased by 8%. The difference in returns will get wider over time. This is because the share amount keeps on getting larger.
There are some things to consider here. Every stock you buy, is not going to nearly double over five years. If the stock goes down, the DRIPs return will be less. Also, there is an opportunity cost. The investor that did not enroll in the DRIP plan could have invested the money in a security with an even higher return.
DRIPS are something to consider for long term investors, that own high dividend paying stocks. By enrolling in a DRIP plan, an investor slowly accumulates shares over time, usually for no commission. It is simple to get involved with them. Research or talk to your broker and find out if the stocks you own offer them.