How Dividend Reinvestment Plans Really Work

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• Hi, My name is Aaron and Im with Dividend Stocks
  Research, today were reviewing our recently
  published article

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How Dividend Reinvestment Plans Really Work
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Im not exactly jealous, but I sure am envious.
Ill fess up and admit it. Back in 1955, Fred
Schwed came up with the perfect title for a
book Where Are the Customers' Yachts?
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The subtitle for Freds book is A Good Hard Look
at Wall Street. Fred was a professional trader
who lost a bundle in the 1929 crash.
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His book is about how the financial industry
makes money, and in a charming way, it reminds us
that as long as people are buying and selling,
the brokerage outfits are happy campers.
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The title of the book comes from an anecdote
about a visitor who went to New York, was shown
the yachts of the stockbrokers, and after
admiring them asked, Where are the customers'
yachts?
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So if youre somebody who fumes and fusses about
paying commissions, advisory expenses, or
management fees, calm down, stop your grousing,
and get yourself a DRIP.
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A DRIP is a Dividend Reinvestment Plan
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Heres how a DRIP works. Its beautifully
simple. The perfect accessory for your best
dividend paying stocks.
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Your stock pays you a dividend, and one of two
things happen. Either the payment goes into your
brokerage account, and adds to your cash
position, or it automatically buys more stock.
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If you dont need the dividend payment for
income, its a smart move to buy more stock, and
there are a couple of reasons why.
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First, you get more stock without paying a
commission. The brokerage firm wont have quite
as much of your money to go out and buy a yacht.

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Second, you accelerate the growth of your
portfolio. You keep adding to your number of
shares, and those shares will pay you more
dividends, which in turn get you even more shares
and more dividends... forever.
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The trick is to sit back patiently, not get
unnerved by the ups and downs of the market, and
to let your stock take a long, profitable cruise.
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Investor psychology being what it is, this is
easier said than done. Theres no halo over my
head. I sold some Express Script ESRX back in
2002 when I should have held on. It seemed like
a smart move at the time, plenty of profit, take
the money off the table, you know the feeling.
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You think youre making a good decision. You
feel pretty good about yourself. But the smart
decision would have been to put in a trailing
stop order and ride a stock I bought for 3 up to
the 90s.
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Oh well. Youll tear yourself up inside if you
dont look back on trades like this as tuition...
an investment in knowledge. Woulda, coulda,
shoulda doesnt pay the bills.
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(Express Scripts, by the way, doesnt pay a
dividend. I cant remember exactly when I bought
it. But those were the days when you got on a
plane and flight attendants actually smiled.)
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Dividend Reinvestment Plans at The Big 3
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Fidelity, Schwab, and ETrade each offer a
dividend reinvestment plan. Fidelity Investments
is free, and you can use a DRIP if you buy an ADR
(American Depository Receipt) that pays dividends.
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The DRIP is also free at Charles Schwab SCHW but
some stocks dont qualify and you can reinvest
dividends paid by an ADR. ETrades deal is
pretty much like Schwab.
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But the brokerage firms change their plans all
the time, so give your guys a call and see what
theyll do for you.
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The Downside of Dividend Reinvestment Plans
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Youve got a couple of decisions to make, and the
first one is whether or not you need the
money. Is the dividend being paid income you
need right now?
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When in doubt, reinvest. You can always change
your mind down the road. The other decision is
whether or not the money could be better invested
elsewhere.
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Theres nothing to stop you from using the money
Procter Gamble PG pays you in dividends, and
using it to buy the stock of another
company. Figuring this out gets you into the
topic of asset allocation, how much of your money
should be invested in what kind of stock.
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If you already have plenty of large cap dividend
stocks, and if youre comfortable with the risk
of investing in small caps that pay higher
dividends, it could be a very smart move.
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If you are too heavily weighted in any one stock,
it would probably be good to bake in a little
diversification.
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It all depends on your appetite for risk, your
timeframes as far as when you want to switch
reinvested dividends to income, and how your
portfolio is set up right now. I hate giving the
old it depends answer but it really does.
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Find The Perfect Dividend Reinvestment Plan Stock
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So lets say you want to check out some of the
best dividend stocks for a DRIP. There are a
couple of places to start looking. The SP 500
Dividend Aristocrats are always fertile ground.
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Check out the 30 stocks on the Dow Jones
Industrials. Not all of them offer a
DRIP... Goldman Sachs GS, UnitedHealth Group
UNH, and Visa V, pay dividends but wont let
you reinvest.
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I have no idea why. And 2 of these 3 stocks are
stiffs anyway. United Health is OK but nothing
to run out and buy, because youre buying it near
all-time highs. Let it take a breather.
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Another good place to look is on the NASDAQ
Dividend Achievers, the mid caps and small caps
that have a history of paying growing
dividends. Just stay away from the regional
banks for now. They tend to be expensive.
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But the utilities are always good suspects and so
are some of the smaller manufacturing
firms. Ive been keeping an eye on a quiet
manufacturing company thats a perfect example.
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It pays a modest 1.33 yield, with plenty of room
to grow, the payout ratio is down below 40, and
the dividends have been growing for the past 12
years.
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The Lindsay Corporation LNN is one of Warren
Buffets neighbors in Omaha, Nebraska. In fact,
Warrens son, Howard, is one of Lindsays largest
shareholders. Lindsay is in the irrigation and
highway construction supply business, and its
been around since 1954.
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The past few quarters have been rugged for
Lindsay, and thats because of trouble in the
irrigation business. When agricultural prices go
down, farmers arent so motivated to update or
expand irrigation.
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Its a cyclical business, and right now Lindsays
in a down cycle. Thats when I like to buy a
stock, and I like the looks of Lindsay. Its off
its 2015 highs...
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Do DRIPS Work for High Dividend Stocks? Yes, but
keep in mind that todays high dividend stocks
could be tomorrows low dividend stocks.
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Its best to cook your portfolio low and slow.
And thats one of my dividend investing
secrets. Its never a bad idea to go looking for
a stock like Lindsay, be happy with the modest
yield, sit back, and let it grow.
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