Welcome to the cult! That’s how I greet many newbies on the Internet DRIP boards. It seems to make sense. DRIPpers deeply believe in dividend reinvestment as a sure and safe way to a secure future and are committed to helping others see it.
When Dale Ennis suggested this column, as a good cultist, I jumped at the chance to write it. Have you ever heard the comment that DRIPs are the most boring types of investments? I disagree.
With an estimated 7 to 9 million DRIP accounts in the USA averaging eight companies per portfolio means approximately one million DRIPpers. Based on population there could be 100,000 DRIPpers in Canada.
Surfing the Internet DRIP boards one finds different approaches and personalities. Some look for safe conservative investments, others growth and others value. Where some see a company rising, others see the same company falling. There are unique approaches to income averaging and valuation. There are hundreds of articles being written on DRIPs and thousands of Internet discussions.
DRIPping is vibrant. DRIPping excites me more than Britney Spears in a PEPSI commercial (I own PEPSI). My wife, Buffy the Berkshire Slayer, calls me a DRIP nerd. She is right. Sometimes I seem to live and breathe DRIPs.
The aim of this column is to be a forum of ideas and current events on DRIPping. While this month’s column is fairly straight forward, future columns could enter the world of Buffy, Dynamiting Cows, Sock Puppets as Investment Advisors or The Correct Way to Fold a Share Certificate. Readers can help by e-mailing items of DRIP interest to email@example.com.
This month the column looks at Moneypaper magazine and its affiliated broker, Temper of the Times. We’ll also look at All About DRIPs and DSPs by George Fisher. Finally, it includes current news items.
You’re discussing DRIPs and someone says their broker offers DRIPs. You say you are talking about DRIPs with stock purchase plans. The other person asks the difference and why you don’t just say so? You answer that DRIP is the word everyone uses. On it goes.
The same situation exists with Moneypaper and Temper of the Times.
Moneypaper is a periodical directed at DRIPpers. Temper of the Times is a completely separate but affiliated broker Moneypaper uses to establish DRIP accounts. A subscription to Moneypaper allows for membership discounts on stock purchases at Temper of the Times. Many people on the Internet are unclear of the distinction and often refer to Moneypaper when they mean Temper of the Times.
Further confusing, Moneypaper’s web site is: http://www.moneypaper.com while Temper’s is: http://www.directinvesting.com.
MP/TOT will purchase from 1 to 100 shares for subscribers in about 850 DRIP companies for US$20 commission (US$15 on featured stocks) plus a very small service charge (up to 100 shares at US$5). That is a savings of US$35 to $40 over most Canadian discount brokers when purchasing US DRIPs.
MP/TOT offer 10 Canadian DRIPs. Despite the difference in the dollar the savings are approximately $25 Canadian per purchase over Canadian discount brokers. In most cases MP/TOT complete all paperwork to set up US DRIPs. Canadian companies still deliver share certificates and registration materials directly.
There are two ways to purchases shares through MP/TOT: snail mail and the Internet.
Orders can be completed solely by mail by obtaining a stock order form from Moneypaper, 555 Theodore Fremd Avenue, Suite B-103, Rye, NY, 10580 (914-925-0022). However, stock orders must be sent to Temper of the Times. The commission on the order forms will be $30. Adjust the amount to $15 or $20 as appropriate on the form. Place your membership number on the form. Be prepared to wait 6-8 weeks before hearing anything.
By Internet, access Temper of the Times. Select "order", login as a member using user ID:XXXXXXXXXXXXX (this will automatically apply the discount) fill out the order form, press submit, print a copy of the order and mail it with your cheque or money order to Temper of the Times, 555 Theodore Fremd Avenue, Suite B-103, Rye, NY, 10580.
Add 10% to cover any share price rise before purchase. MP/TOT refunds any difference over one dollar. Personally, I send more than 10% to ensure completion and have never had a problem.
Regardless of the method, stock orders must go to the Temper address. Only send money to Moneypaper if you intend to subscribe to the periodical (US$90). Cheques to Temper must be drawn on a Canadian bank branch located within the US. Money orders in US funds are acceptable as are cheques drawn on US banks.
The first book I read on dividend reinvestment planning was Commission Free Investing by Jim Otar. It made great sense to me then and it still does. I’ve read everything possible on DRIPs since. Few books gave me more than Jim’s book did. With so little to choose from in Canada there was little need for more.
However, there are many companies in the USA to choose and it’s important the small investor pick wisely. All About DRIPs and DSPs by George C. Fisher is a book that goes beyond being a "How To" book (US$16.95 plus US$4.55 s&h, North Shore Associates, Box 1594, Sagamore Beach, MA 02562 (508) 833-7115 or www.powerinvestdrips.com). It is a "Why and When It Makes Sense To" book. Humour and a feel good positive style make it more than a textbook. Imagine "brand loyalty" described as the willingness to tattoo a Harley-Davidson logo to your body?
Mr. Fisher recognizes DRIPping can be a process tailored to the small investor’s individual needs. Throughout are discussions on every topic of how individual circumstance might influence interpretation and decision making. The basic tenet is that everyone needs to save and DRIPs are an ideal means to an end.
There are six steps to successful DRIPping: Pick a Goal, Reflect (by focusing on stocks within a personal risk-related comfort level), Research, Diversify, Take the Plunge and Keep Up.
Recognizing the goal is long-term buy and hold, researching DRIPs means finding the best among established companies. Once a daunting task, research is much easier for the individual on the Internet. Seek additional capital gains from increasing stock prices and the reinvestment of increasing dividends. Key is management’s ability to implement long-term strategies and action plans.
Evaluate management by noting clear indications of a goal of increasing shareholder value. Does management adhere to a Corporate Ethics Statement? Achievement is seen in above average earnings growth rates, maximum 65% dividend payouts, dividend growth rates at or above industry average, Return On Equity (ROE) and assets 12% or higher and above industry average, a debt to equity ratio less than 50% and an S&P rating of B+ or higher. An aggressive DRIPper might accept higher debt if ROE and ROA are excellent while the conservative utility investor might focus on earnings, dividend growth and the payout ratio.
Use the Price to Earnings Growth (PEG) ratio to determine the timeliness of a DRIP. PEG is current price divided by current earnings per share divided by the anticipated Earnings Per Share (EPS) growth rate. The best time to start a DRIP is when a good company is undervalued. A PEG less than 1.0 is desirable and should be within industry averages. Current PE should be close the bottom of the 5-year range, below the 5-year median and below the industry median. There should be a consistent pattern of increasing dividends with a low payout ratio. Dividend growth and yield should be above industry average. The Price to Sales Ratio should be below 10 and below the industry average. Broker recommendations are taken with a grain of salt.
Mr. Fisher leads the reader through a basic understanding of what to look for in an annual report. The reader is not overwhelmed by numbers. Rather, each section of an annual report is discussed with humour and insight to possible red flags.
The strengths of particular journals, magazines, company updates and Internet sites are examined. Different kinds of risk and how they affect stock prices are considered.
Diversification is stressed. Various methods to achieve diversification in consideration of age, circumstance and personality when constructing a DRIP portfolio are presented. Every portfolio goes through three stages: accumulation, consolidation and spending (disbursement). There are suggestions on when to sell a DRIP. Ideally the eight S&P industrial sectors are included and equally weighted. Examples of how to include bonds in a DRIP portfolio are shown.
All About DRIPs and DSPs concludes with a list of companies that meet the criterion for selection by the author.
This book is not without fault. Some tables fail to account for reinvested dividends when calculating accumulated cost bases. Regardless, Mr. Fisher has raised the bar for other DRIP writers. I consider it an extremely valuable resource.
When it comes to DRIPping one size does not fit all. All About DRIPs and DSPs is all about providing the individual with knowledge and the tools to make intelligent choices based on their unique circumstances. Once the process is learned DRIPping becomes an art form. This book is about creating good art.
The Motley Fool recently introduced fees (US$29.95 per year) to post on their message boards. Many prominent posters have since resurrected dormant-free DRIP message boards at Raging Bull. Most promising is the DRIP Investor Resource Centre board started by George Smyth. Beta testing of George’s board should be complete by the time of publication.
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 firstname.lastname@example.org. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb 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 March 2002