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Letting Dividends Do Their Work

Adventures in DRIPping - The Average DRIPper

Robert D. Gibb

DRIPping, once referred to as the most boring form of investing, is often described in the media as one size fits all. The media tells the investor to buy a share from a broker, take it out of street name and then income averaging investments by contributing the same regular amounts to the same company each and every investment period. Is that what DRIPpers really do?

Following are a series of poll questions designed to look at the practices of DRIPpers. The samples are small, not overly scientific but give a general idea of what goes on in the community.

On average how much do you contribute in total as Optional Cash Payments per month to your DRIPs?
(This does not include dividend reinvestment).
Response # Votes % of Total
$100 or less 64 37.6%
$100 to $199.99 34 20%
$200 to $299.99 16 9.4%
$300 to $399.99 11 6.4%
$400 to $499.99 15 8.8%
$500 to $999.99 20 11.7%
$1000 or more 10 5.8%

The obvious here is that DRIPs appeal to small investors. Over 90% send optional cash payments of less than $1,000. Over 80% send OCPs smaller than $500Almost 60% send less than $200 per OCP.

This is important because many DRIPpers consider whether or not to use discount brokers to purchase companies that do not offer DRIPs with SPPs (share purchase plans). Considering the growing number of discount brokers offering trades just below $10 it takes a $500 investment to get a 2% commission or $1,000 for a 1% commission. Using Questrade’s $4.95 program takes a $250 investment to get a 2% commission or $500 for a 1% commission. It would seem the use of discount brokers is not a good fit for the majority of DRIPpers.

How many companies on average do you send OCPs to on a monthly basis?
Response # Votes % of Total
One 14 25%
Two 10 17.8%
Three 9 16%
Four 7 12.5%
Five 4 7.1%
Six 4 7.1%
Seven 1 1.7%
Eight 3 5.3%
Nine   0.0%
Ten or More 4 7.1%

The average number of companies contributed overall is about four. Over 70% of respondents send OCPs to four or less companies per month. This is not surprising as we know the majority of DRIPpers are investing less than $200 at a time. This is exactly the population often targeted by mutual funds.

?As well, funds trumpet diversification to small investors as a safety factor citing the forty or more companies they hold. How do DRIPpers feel about diversification and the need to hold large numbers of companies?

How many DRIPs do you think are reasonably necessary to achieve an acceptable risk level?
Response # Votes % of Total
Four or Five 8 12.9%
Six or Seven 10 16.1%
Eight to Ten 25 40.3%
Eleven to Fourteen 8 12.9%
Fifteen or More 11 17.7%

There are studies suggesting there is no significant reduction in risk after selecting 16 ? 20 well chosen stocks. The trick is to choose stocks well somehow. Over 80% of DRIPpers believe diversification can be achieved with fewer companies. I suspect the reason is the SPP which allows DRIPpers to take advantage of temporary declines in well chosen companies. This would seem counter to the media?s basic description of everyone income averaging their DRIPs.

Which of the following most closely matches your investing personality when it comes to sending OCPs to your DRIPs?
Response # Votes % of Total
Strict DCA'er sending the same amount to the same companies each and every investing period. (Basically putting your OCPs on auto-pilot.) 10 16.1%
Non-Strict DCA'er possibly sending to different companies in a period than the last period or varying amounts from period to period. 52 83.8%

Over four out of five DRIPpers are not practicing investing in DRIPs as described by most of the media. I would argue that DRIPpers do believe and practice income averaging however it would seem the majority are income averaging money rather than companies. That is, they are constantly contributing money but looking for opportunities at the same time.

The results for the final question were a surprise.

Which of the following most closely matches the frequency that you make Optional Cash Payments (OCPs)?
Response # Votes % of Total
Monthly (or more often) 17 43.5%
Every 2 months 6 15.3%
Every 3 months 6 15.3%
Every 4 months or longer 2 5.1%
Accumulate cash investing only when I think companies are on sale 8 20.5%

I had expected the majority to contribute monthly. That is the largest group at 43.5%. However, almost 41% contribute only quarterly or less often. Some of this can be explained for DRIPpers owning Canadian companies that only accept quarterly OCPs. This pointed out to me the danger of test constructor bias. The results above should be read with the caution that I might have unconsciously constructed questions that would agree with my expectation. I say this because I have always felt that the use of low-cost discount brokers to assist DRIPping is not good because any selection with a broker must outperform the DRIP selection passed on by the percentage amount of the commission in the first year just to be even. Even though commissions have dropped I still feel the same way for most DRIPpers. The results above, though, indicate a significant number save up and make opportunistic investments. If you have significant amounts saved then the use of discount brokers to assist a DRIP portfolio makes sense.

The average DRIPper might be described as a small investor who prefers individual stocks over mutual funds and also appreciates the conservative benefits of a stock purchase plan but still is a bit adventurous making strategic investments.

Totally Off Topic

I am an AirMiles collector. Columns comparing AeroPlan and AirMiles often show AeroPlan to be superior. These comparisons only deal with points awarded for amounts purchased on credit card. They fail to consider the bonus points available through AirMiles affiliate partners. If you know how to use and accumulate bonus points you can really boost your return. I?m adding this section because of a couple of events of the past week.

First, there was an excellent article recently by Arthur Drache in the National Post dated October 2, 2007 on the difficulty his clients are having claiming charitable tax credits from CCRA for donating AeroPlan points to charity. CCRA has not been able to figure out how to value them. If you?re an AirMiles collector and contribute points to charity here is a suggestion:

AirMiles offers shopping gift cards from about 40 affiliates. The average value of these cards is $0.13 - $0.14 per AirMile to purchase them. For example, you can purchase a $20 Shell Fuel coupon for 175 AirMiles which works out to almost $0.115/AM. Instead of donating the points buy the gift cards and donate them. The value is clearly stated and you should get an equal value charitable tax receipt. (Interestingly, AirMiles charges $0.30/AM if you need to top up for a purchase.)

Want to make a quick 19.33% return on your money?

One of AirMiles affiliate partners is Safeway. Every week Safeway offers bonus AirMiles on name brand and house brand products. While it takes a $20 purchase usually to get one AirMile on a credit card you can often pick up more than 50 bonus AirMiles for less than a $20 purchase at Safeway. Case in point:

This week Safeway is offering Chef Boyardee tinned pastas 4 for $5. However, if you buy 6 there is a 40 AirMile bonus. Six would cost $7.50 and you pick up 40 Airmiles worth about $5.20 towards gift cards that you can use to reduce expenditures elsewhere.

How do you turn this into a 19.33% gain?

Donate the pasta with the receipt to a food bank for a charitable tax receipt. If you?re able to reduce your taxes owing by 50% the $7.50 expenditure will benefit you $3.75. The result is:

$7.50 expenditure = $5.20 towards gift card + $3.75 tax reduction = $8.95

That?s a 19.33% return on your money while at the same time you?ve benefited a charity.

This really only makes sense if you purchase significant amounts and I?m not sure if Safeway would limit numbers. Also, CCRA could value AirMiles as income at some point. Still, an interesting idea and showing I definitely have too much time on my hands.

Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 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.

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