DRIP investors should have a game plan.
by Steve Gail
We see it at all levels in sports and business or even on a pleasure outing or a family get-together. Any endeavor needs a good game plan to have any chance of being successful. DRIP investors are no different. This article will give you a basic outline as to some of the issues that you should be considering before you make any kind of move regarding a DRIP program.
You all have an understanding of the basics by now of how DRIPS work. If anyone isn't quite sure or new to our site, a glossary of definitions can be found right here on our site). Assuming we all know what DRIPS are and how they work, the first thing we need to do is maximize our investment. What I mean by that is, we learned in earlier articles it is better to find a Dividend Reinvestment plan that offers both reinvestment of dividends and an optional cash investment plan with automatic reinvestments. This allows us to accumulate shares of stock quicker and allows us to establish a monthly periodic investment schedule so that we may get into the habit of investing the same amount of money monthly for a long term. It the DRIP plan offers automatic reinvestment through you checking and savings accounts (be careful some DRIPS DO NOT.) this allows you to determine how much you want to contributed to your DRIP and have that much automatically deducted from your bank account to buy additional shares. [This process simulates dollar cost averaging, which is where you invest the same dollar amounts into an investment at pre-established periods of time (e.g. monthly, quarterly, etc.) and buy more shares when the price of the issue is down and fewer shares when the price of the issue of up] over time.
Once we have established the stock to be chosen for our DRIP, which should include an optional cash program if at all possible, we then need to determine what type of account registration we need. These registrations are the same as the ones that you have to decide on when you set up a normal brokerage account.
(See list below)
2. Joint Tenants with Right of Survive ship
3. Joint Tenants in Common
4. Community Property (used in California in specific cases)
5. Uniform Trust or Gift to Minor accounts
6. Individual Retirement Accounts
7. ROTH Individual Retirement Accounts
8. Corporate accounts (special situations)
Now that the easy part of the process is complete, we need to decide on with company or companies we will use for our DRIP plan. Below is a list of criteria that one might consider in determining an appropriate stock.
1. Risk Tolerance - are you an individual that can tolerate volatility in the performance of their stock or do you need a stable sideways moving equity that just gives you dividends and its price rarely moves.
2. Price of underlying Security - this will influence how much and how many shares your dividends and optional cash program can purchase.
3. Performance (Current, 1 year, 3 year, 5 year, 10 year)
Consideration to performance helps an investor to estimate potential problems or positive developments in a stock's performance over short or extended periods of time. One should pay special attention to 5 and 10-year performances, since your DRIP investment has a long-term horizon. So one needs to be sure there chosen company has some staying power and is not just some short-term flash in the pan.
4. Fees - one should pay careful attention to per share and transaction charges when determining any DRIP plan. Although the fees may seem incidental at first glance, they tend to add up when you combine at the transactions in a monthly automatic investment plan. Even minor fees can cut into your annual total return from anywhere between 1/2% to as much as 5%, depending on the DRIP you chose and the fees associated with it.
5.Total Return - Total Return needs not to be confused with Performance, especially when considering the compounding of a given asset such as a stock's performance. (E.g. a company may have a 50% increase in its stock price, but the dividend remains the same, under this scenario, you would receive one-half as many shares because you would now be paying twice as much for the purchase of the stock.)
These are just a sampling of some of the factors that an investor might consider before he makes his final decision on a DRIP plan. You may have other factors that you consider as or more important before you personally make up your mind. There is no right or wrong decision here, just an awareness that some type of due diligence needs to be done.
Coming next week, Dividend exclusion, if passed, which Dow Stocks will be impacted most; negatively as well as positively.
You might be surprised!
So until next time,