Saturday, December 16, 2006

DRIP DRIP (investing)

You put a bucket under a steady drip and in time the bucket gets full. Give it a little more time and it overflows. This is precisely the idea behind Dividend Reinvestment Plans (DRIPs). Those smallish dividend checks that we don’t seem to really know what to do with now have a purpose. Many companies offer the chance to reinvest those checks back into fractional shares. Your dividends buy more shares, which throw off more dividends, which buys more shares… DRIP DRIP DRIP.

Make no mistake; these plans work best over the long haul. I have had a couple of my DRIPs for over 10 years and counting. With DRIPs and a long term view you will see the market different, at least I do. You may even catch yourself looking for the stock to drop some so your dividends will buy you even more shares. The natural ups and downs of the market becomes an advantage over the long run. Your checks buy more when the stock is down and less when the stock is up allowing you to average a good buy price.

Companies that have a strong track record of paying dividends are good places to start looking. You also want companies whose payout ratio is not super high. If the payout ratio is high then they may be using all of the profits to pay dividends instead of using the money to grow the business. Ideally you want a company that is still growing, it doesn't need to have rocketing growth. This growth allows them to not only pay consistently but also increase the size of the dividend, yearly would be nice. Think bigger and bigger drops in the bucket.

A few companies that pop into my head are MO, XOM, GE, and PG. (The fine print: these are ideas only; please do your own homework, make your own decisions, and take responsibility for the good and bad things that result.) Here are some of the companies that mange all the paperwork and details of the DRIP programs for many companies (a place to start).,
Bank of New York, and Mellon Investor.

Remember the sooner you get your bucket under the DRIPs the quicker it will get full and start overflowing.

That’s it for today. Have patience with the DRIPs and keep an eye on your EveryDay Money.

1 comment:

drip investor said...

Good post -- my site provides a list of DRIP plans with direct links to transfer agent.