The DRiP Investing Resource Center
Your Location For Dividend Reinvesting Information

Punching the Parrot

Robert Gibb

I used to handle music at a small church. The pastor there was well known in local theatre. With the tremendous amount of film work in British Columbia she had been making continuous trips to Vancouver to audition as an extra.

Once she received a callback for the starring role in a headache commercial. The set-up was to portray a harried waitress in a restaurant that was also home to an irritatingly talkative parrot. As the stresses of the day build to a volcanic migraine the prospective waitresses were asked to walk over to the parrot and yell, "Shut Up!"

One by one those auditioning walked up to the parrot and screamed, "Shut Up!" One by one they were told, "Thank you. We’ll let you know." Finally, a prospective waitress stormed up to the parrot yelling, "Will you Shut Up!" then laid a potent pile driver on the parrot’s proboscis sending poor Polly plummeting perilously to the pavement. For stepping outside the minimum requirements this waitress got the job.

Since then the pastor has punched the parrot whenever possible. I punch the parrot with my DRIPs.

Last year I ran several polls on Internet discussions boards. Fully seventy-five percent of respondents indicated they did not follow strict or blind income averaging (called dollar-cost averaging or DCAing in the USA). That is, seventy-five percent of DRIPpers do not send the same amount of money to individual DRIPs at regular intervals. Reasons such as cash shortages, etc. explain some of the variance. However, most people appear to be varying contributions because they see a fundamental flaw in income averaging. That is, it produces an average return. While virtually every writer on DRIPs advocates this method of investing, experienced DRIPpers see other opportunities.

I once read that the only reason to buy individual stocks is to try to outdo the market as a whole. Otherwise, just buy index mutual funds. Below are two different approaches that try a little harder. There is nothing to say that these approaches are better or will guarantee a better return. However, they do have a certain logic about them. These approaches attempt to skew contributions to the low end of the cyclical nature of a company’s stock price in the belief it will maximize return when the stock price rises later. Much like the waitress above, these methods step outside the minimum to punch the parrot.

The Balanced Approach

Another problem I see with strict income averaging is that it sets investing on autopilot. It’s possible to opt for a DRIP’s automatic bank withdrawal feature and never think about the company again. That’s investing over time. In the extreme case that’s a mistake.

I have neither the skills nor the time to be constantly analyzing company data. However, the balanced approach helps you focus attention on your companies at a moment in time without being time consuming. This is accomplished by looking at how your companies are performing relative to one another within your portfolio.

Basically you start by placing an equal amount of money in several DRIPs. As time progresses optional payments are skewed to the laggards to keep the dollar value of each company equal. This forces an investor to buy low within their portfolio. The belief is, that having chosen well, all companies go through business cycles independent of one another. The aim is to take advantage of the troughs within a portfolio. Another aim is to achieve the same dollar value in each investment.

As an example, invest $1000 in each of Companies A and B. At the end of one time period Company A is worth $1000 and Company B is $1050 and you wish to contribute $100. Send $75 to Company A and $25 to Company B. Both Companies are now in balance at $1075. Ideally this approach works best with a portfolio of companies with similar rates of return.

Whether you rebalance monthly, quarterly or yearly the investor decides where their money will do the most good at that particular moment. The process is the same as rebalancing a mutual fund portfolio. At the very least the investor is aware of how their companies are performing relative to one another.

INVEST %

A MoneySaver subscription allows access to Moneypaper’s INVEST % feature at http://www.directinvesting.com. INVEST % uses the yearly high/low stock price to determine the size of an optional contribution. Suppose your usual contribution is $100 a period. If a stock is at the yearly low, send 150% of the amount or $150. If a stock is at its yearly high, send 50% or $50. Prices in between are adjusted accordingly.

George Smyth pointed out a problem with this approach. If your portfolio is high, then you will be accumulating money in the bank that might be better invested. George uses the INVEST % calculated values to determine how much to send to each company relative to the other companies he is contributing to that month. In his own words: "…if the INVEST % calculations indicated sending 100% of the expected amount to Company A, 75% to Company B and 50% to Company C, then I would send the total planned amount to the companies, Company A receiving a third more than Company B, and twice as much as Company C."

Thankfully, George provides a free spreadsheet to calculate the amounts at: http://www.dripinvesting.org/tools/tools.asp.

Both these approaches employ a significant change of focus. That is, they income average dollars not companies. Over time, the laws of average should eliminate price change effects to investment dates. The trick is not to pick an Enron. Neither is a guarantee of success.

Current Events

At the time of writing Encana informed me that no decision on whether to continue the Alberta Energy Co. DRIP has been made.

Medtronic (NYSE: MDT) manufacturer of defibrillators and pacemakers has added fees to their formerly fee-free DRIP.

XL Capital (NYSE: XL ) of Bermuda has announced a fee-free DRIP. They are in the business of insuring low frequency, high severity risk situations and were hit significantly by the events of September 11.

Robert Gibb, 106-1217 Pandora Avenue, Victoria, BC, V8V 3R3 (250) 383-7075 [email protected]. Robert is a frequent contributor to Internet DRIP boards under the nickname OperaBob.

© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published July/August 2002