One never knows where things will lead. After officially retiring in 2008 so many things, projects and business offers came out of the woodwork there was hardly a moment to breathe or should I say “gasp” during the financial meltdown. Did you see anyone smiling during the meltdown? If you did, likely they were DRIPpers. The projects have slowed down and the business offers are under control so now I can once again turn my attention to talking about what one writer, whose name I can’t recall, once referred to as the most boring form of investing: DRIPs. Then again didn’t Peter Lynch say, “Boring is good.”? So here’s a boring story.
A little background:
Recently, I had the good fortune to be interviewed by both the Globe & Mail and the National Post about DRIPs. Whenever the topic of DRIPs arises my wife’s eyes invariably roll to the back of her head. This time excitement reigned when the Globe & Mail photographer asked her to pour a bucket of water over my head to visualize the concept of DRIPping. It’s the first times she has smiled when the topic of DRIPs has come up.
Something I stress with every writer interviewing me is that to a DRIPper it is not the reinvestment of dividends that is most important but the use of the fee-free stock purchase plan or SPP while income averaging. Invariably when the articles come out the writer has focused on reinvestment. This is to be expected. When it comes to stocks these writers deal in a world that is 99% moment in time investing whereas DRIPpers invest across time. The media is constantly telling us that over 40% of stock market gains can be attributed to reinvested dividends. That’s sexy to these writers. General media writers do not fathom the concept of an SPP. They spend their days writing for people focused on investments of tens of thousands of dollars or more. Truth is the average DRIPper invests $300 per month. That’s mutual fund territory. At the same time a methodical DRIPper can produce amazing gains, far outstripping mutual funds that across time can be richly rewarding.
Mark J. Heinzl in his book “Stop Buying Mutual Funds” pointed out that placing a $10,000 investment in the average Canadian equity mutual fund over 30 years created an end value of $98,000 for an $88,000 profit. To a naïve investor that might seem a tremendous accomplishment. What wasn’t obvious was the $77,000 the fund company drew off with a 2.1% average MER. The fund company made almost as much money as the investor. GlobeFund as of Aug. 31 2010 lists the average MER at 2.45%.
Is there a better way for mutual fund investors? For some it is Index funds. For others it is income averaging a portfolio of no or low-fee DRIPs and taking advantage of dips or opportunities when they happen. This article will look at some of the advantages that DRIPs have that are often missed by general media writers.
The general media describes income averaging as investing the same amount of money each and every investment period. As an example someone might buy $100 worth of a particular income fund on the 1st of every month. Two polls I’ve conducted on separate websites show that over 75% of DRIPpers income average differently. Most send varying amounts of money to differing companies depending on current conditions. Bank of Montreal (TSX: BMO) might be sent $500 one month while Enbridge (TSX: ENB) is sent $250 the following month. During the financial meltdown 80% of smiling DRIPpers increased the amount of optional cash purchases (OCPs) specifically the banks. So what was the upside?
I’m going to look at two companies I focused on during the meltdown, Bank of Montreal and The Bank of Nova Scotia. Being an aggressive-conservative strategic investor I like to play dips when they happen. DRIPs allow this especially those that allow monthly OCPs. My observation is a stock’s price falls much quicker than it recovers in unusual circumstances. The media often tells us no one can pick a bottom. However, making monthly purchases after a fall can sometimes be a good way to find an average bottom.
How can this be worked to advantage? The conservative in me favours income averaging. The aggressive maintains a focus on price dips. The strategic keeps a cash reserve for special circumstances such as temporary bad news.
Money, rather than companies, is income averaged on a monthly basis. That is, I send money somewhere monthly but not always to the same company. During the financial meltdown, as in the long run, I viewed this as temporary the focus became the banks.
During 2008 prior to the financial meltdown the average price paid for DRIP shares was:
After the meltdown money from the cash reserve was used to increase OCPs up to three times the usual monthly amount.
Average price paid: $30.35
Current price: $61.65
Unrealized Capital Gain: 103%
Average price paid: $32.06
Unrealized Capital Gain: 72.5%
Until Basel was settled and the banks began talking about dividend increases again I have made no further investments in either bank. DRIPs provided the flexibility to take advantage of the financial meltdown with increased contributions to specific equities for only the cost of a stamp. An added benefit is these specific purchases are also yielding 7% to 9% roughly equivalent to a 12% to 14% bond.
So while media writers focus on reinvestment of dividends when it comes to DRIPs mostly the DRIPpers are focused on the stock purchase plan (SPP) and its ability to create good to great capital gains for small investors during special opportunities. DRIPpers can pick their opportunities more easily than mutual fund investors while paying the MERs to themselves.
Let’s look at a few other items the media seems to get wrong too often:
1. DRIPs have too much paperwork and it’s too hard to track your ACB (adjusted Cost Basis).
I read an article today where a writer said if you have 15 DRIPs you’ll get 4 statements a year per company and it would be too much work calculating an ACB from 60 statements. I wonder if this writer is still using a typewriter. Today spreadsheets that automatically calculate ACBs abound. Entering 60 items would take about 30 minutes a year or about 35 seconds a week to input. Quicken works. Free spreadsheets are located here:
Personally, I like David Stanley’s approach to the problem of calculating ACBs. He says he’ll let the government figure it out after he has passed on.
As for the paperwork the final statement of the year for most companies has all the year’s information on it. You can throw out the other 75%.
2. You have to get the first share through a broker which is often expensive.
I have over 30 DRIPs. Only two were purchased through a broker. The rest were purchased through MoneyPaper.com (with whom Canadian MoneySaver subscribers get members’ discounted prices), group purchases and trades with friends or over the Internet. This has saved $2,000 in commissions (which according to Heinzl would be worth about $35,000 in a no-fee Index fund or ETF in 30 years.). People are exchanging thousands of shares, one share at a time on the Canadian MoneySaver discussion boards or at the DRiP Investing Resource Center for little or no cost.
3. You have to take your shares to a broker to sell them.
While this was true years ago most DRIPs handled by Computershare Canada can be sold through the plan as can a couple of companies handled by Canadian Stock Transfer. Commissions vary but are often around $15 for the sale plus a few pennies per share sold. Virtually all US DRIPs can be sold through their respective plans.
4. You can’t name your price.
Yes, however transfer agents are required to get the best price possible. Commonly shares are priced as the average of all board lots (multiples of 100 shares) traded on the open market over a 5 day period. As to naming a particular price, the same people saying that are also saying, “You can’t time the market”.
5. You can’t name your price on reinvested dividends either.
Dividends can always be taken in cash and added to a separate OCP, brokerage or bank account.
It seems DRIPpers will have to continue to educate the general media one writer at a time. It’s not the reinvestment of dividends that is the big deal. It’s strategic income averaging through the SPP that has the potential to create the biggest return. I never even discussed the $5 & $6 purchases made in H&R REIT (TSX: HR.UN) during this period now trading above $19. Who cares about a 5% yield when you can get a 200% to 300% capital gain?
Needless to say, not all my DRIPs are winners. I own Bank of America and Pfizer in the US, but give them some time!
Yes, we DRIPpers have smiles on our faces but I hear my wife calling and I think she has another bucket of water. I can’t wait to tell her about Grace Groner who died recently at 100 years of age. Seems in 1935 she bought 3 shares of Abbott Labs (NYSE: ABT) for a total cost of $180. She left them in Abbott’s dividend reinvestment plan and willed them to her local community college. They were worth $7,000,000 yielding about $250,000 per year. If only she’d used the SPP as well.
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.