Selecting a Dividend Reinvestment Plan is the easy part, the question is how to determine which companies you select for your DRIP.
by Steve Gail
Dividend Reinvestment programs are relatively the same in their enrollment and setup process. However, there may be some slight variations between them due to varying fees and limitations as to how much stock may be purchased. In regards to these slight differences there really isn't much to analysis, however selecting the individual companies that you ultimately decide to invest with, requires the same due diligence one would use if he or she were investing in any investment vehicle of there choice. There are many such questions that arise that one must consider before making that initial purchase, no matter how small it may seem. This decision is important if one is planning not only the reinvestment of the dividends of there selected stock, but even more important when selecting a stock in which they plan to utilize additional cash investments on monthly or other periodic time intervals.
What are some of these criteria?
There are so many decisions that must be made and then additional decisions after you have applied any criteria that you believe to be important. Let's just give you some basic criteria at this time.
Performance: (usually is an excellent indicator of how well a stock has done in the past, usually a comparison between 1, 3, 5 and 10 years (if available is an excellent indicator of how well a stock has been performing over long periods of time. NOTE: The reason you want to include 5 and 10 year performances, is that you want to be able to see how well a company has done through any down trend the market may have experienced. CAVEAT: Always remember that past performance in a security is in no way a guarantee of future results. - Never limit your research to performance only! )
Management & Operations: A company's management team is usually a big reason for the success or failure of its operation. The management team usually surrounds itself with good people who have had a successful track record either over time or with a prior corporate situation. [ e.g. Rupert Murdock, Ted Turner, John Chambers (Cisco Systems), Michael Eisner (Disney) ]. Just one additional issue to consider.
Knowledge of the Underlying Industry: Sometimes the best type of investment to be made is in an industry that the investor is involved with directly or where the investor has an excellent knowledge of how that industry works. NOTE: The more educated an investor is about a specific industry, the better-informed decision he or she can make regarding that industry. One might consider questions regarding seasonal activities, competitors, changes in the industry, new product and patent developments, cutting edge technology, and the list goes on. All reasons to potential consider before making any contribution to not only your DRIP, but to any investment plan.
These are just a few basic things one should at least examine before making ANY type of investment decision. Just because a stock has "household name" recognition, doesn't mean its a winner for a DRIP program; need I mention the likes of ENRON, WORLD COM and the many over-valued companies that were part of the NASDAQ bubble and fiasco of the late 90's.
Believe me when I say, there are numerous criteria that should be and can be utilized in determining what stocks you eventually select in any Dividend Reinvestment Program. The main criterion is to be sure that you have a "long" term horizon as your outlook for your DRIP plan. There are some excellent sources that one can use to help select appropriate stocks for your DRIP plans, based on the criteria that you think is important. May I suggest the use of "Morningstar investment services" as a starting point for a good outside source. Nothing is better to increase one's education about a subject matter, then to constantly read and continue research on any investment you ultimately select for your DRIP plan. We will on numerous occasion reference some of these investment criteria again in some of our articles in the near future. I hope I have left you with some ideas to kick around in your head.
So until next time....