Sometimes the most powerful investing strategies are also the simplest!

July 12th, 2011 Posted in Money and Markets Newsletter

by Nilus Mattive

Nilus Mattive

A lot of folks just don’t get dividends.

They think they’re little throwaway payments that companies make to shareholders. Or they say only deep-pocketed investors really benefit from them.

But nothing could be further from the truth!

In fact, this might surprise you, but 41.73 percent of the stock market’s historical returns have come from dividend payments.

That’s right — from January 1926 through June 2011, nearly half of the S&P 500′s rise can be attributed to those lowly dividend payments … or more accurately, their payment and reinvestment.

This is precisely why I recommend buying companies that consistently lavish more and more cash on their shareholders.

And it’s also why, if you’re currently receiving dividend payments and can afford to forgo the income right now, I strongly recommend plowing them back into more shares.

After All, Dividend Reinvestment Is One of the
Simplest, Most Powerful Strategies Around!

First, the bad news: To see real results from dividend reinvestment, it WILL take some time.

But once it starts kicking, things reeeaaally get rolling!

That’s because dividend reinvestment is based on the “compounding effect,” whereby money you’ve already earned on your investments begins to earn returns of its own.

For example, if you put $10,000 into a savings account with a 6 percent annual interest rate, you’ll have $10,600 after one year. Next year, you’ll be earning 6 percent on the $10,600 rather than just the original $10,000.

That might not seem like a big deal, but the effects can really add up over time. Ten years later, you’d have almost $18,000, 80 percent more than you started with!

And if anything, the compounding involved with dividend reinvestment is even more accelerated than simple interest compounding on itself.

Here’s why: You’ll be steadily increasing your holdings of a particular stock over time, setting yourself up for even more dividends down the line.

Plus, if you choose companies that consistently RAISE their dividend payments, the end result is actually yet another layer of compounding on top of it all.



Better Yet, It’s Extremely Easy to
Start Reinvesting Dividends …

Hundreds and hundreds of companies are more than glad to help long-term investors buy additional shares with their dividends, so they’ve created dividend reinvestment plans (commonly known as DRIPs) to make the process easier.

Here are some pointers on DRIPs:

  • In some cases, the company runs the plan itself. Most times, however, the plan is run by an independent agent.
  • While a few plans allow you to buy your initial stock directly, most require you to be a current shareholder.
  • Many plans also allow you to buy additional shares with your own money; and some will even automatically deduct a set amount from your checking or savings account at predetermined intervals.
  • A select number of plans even allow you to purchase your shares at a discount (generally between 1 percent and 10 percent) to the stock’s current market price. Talk about a deal!

Now, before you sign up for one of these plans, please note that if you don’t plan on participating for at least a few years, it’s probably not worth the hassle.

Okay, you own a dividend-paying stock and you want to reinvest your dividends. How do you get started?

First, find out whether a company offers a DRIP plan. You can contact its investor relations department to find out. They’ll be happy to provide you with the necessary forms and/or the plan agent’s phone number.

These days, you can also find much of the information on third-party websites.

One very useful site is www.computershare.com. This company acts as the plan administrator for hundreds of DRIP plans and their website allows you to search by company name. Another valuable resource is www.moneypaper.com, which offers many of the same features.

If your company offers a plan, you simply sign up for the plan by phone or online. Then, the company itself or its plan agent will automatically reinvest your dividends into additional shares. If they allow additional purchases, they can also help you set up automatic deductions from, say, your savings account.

If your company doesn’t offer a DRIP, don’t despair. There are still ways to efficiently reinvest your dividends. Many brokers will do it at no charge!

What about mutual funds and ETFs? Many funds will automatically reinvest dividends for you. And although exchange-traded fund investors are typically responsible for reinvesting any dividends they receive, your broker might be willing to do it for free. So don’t be afraid to ask.

After all, while there are certainly plenty of powerful investing approaches out there, dividend reinvestment has to be one of the most powerful — and most proven — ways to build substantial wealth over the long term.

Best wishes,

Nilus

Source: Money and Markets




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