The Dividend Investing Resource Center

Letting Dividends Do Their Work

Your Best Deal

George L Smyth

A while back, one of our posters wondered as to whether or not the DRiPper gets a fair shake when it comes to the purchases that a company makes for their DRiP participants. One could reasonably speculate that when a company makes a large purchase to cover the incoming monies from DRiPpers, the increased demand could result in the average purchase price being greater than it would have been otherwise.

Another concern might be that of getting a fair price. Since the company does not have a vested interest in ensuring that the participant gets the best price possible, the DRiPper could get shortchanged.

As mentioned, this is all speculation, and one in which I can only guess as to what exactly goes on. However, I decided to take a look at the purchases that I had made through one of my DRiPs, and see whether or not I could have gotten a better deal by purchasing at a time before or after my DRiP purchase was executed.

My Intel DRiP goes back to 1997 and my purchases ended when they made the decision to go the high-fee route, so I decided to use this company to make my comparisons. I used the three-year period between December 1998 and 2001 to make my comparisons, and feel that I covered a large enough time period to make the results meaningful.

The question that I wanted to answer was whether or not the stock price became inflated on the day of purchase. If this were the case, then perhaps it would be reasonable to pay for a purchase a day or two before or after this purchase date. I decided to compare the closing price of the day of the purchase to the closing price ten days before and ten days after. I only used the dates when I actually made a purchase for the comparison, so that I could ensure that the proper day was being used. As I had made 20 purchases during that three-year time span, I felt that any tendency would be shown in this timeframe.

I also wanted to establish a means for determining whether or not a variance would be significant. There is a statistical way to do this, but I decided to make things easy and determined that if a variance came to 1% or greater, then there may be some significance.

The results surprised me somewhat, as I did not find the information that had been suggested. A day before and after the purchase date, the price averaged slightly more than on the purchase date. Two days before and after, the price averaged slightly less. I saw nothing of significance until four days before the purchase date, when the price averaged a little more than 1% less. The only other two significant dates were both 10 days before and after, where the variance was a little more than 1.25% greater. I believe that it can be safely assumed that dates this far out have nothing to do with the purchase date.

Average price variance the number of days before the purchase date:

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1
1.27% 0.88% 0.98% 0.15% 0.57% 0.22% -1.05% -0.05% -0.46% 0.18%

Average price variance the number of days after the purchase date:

1 2 3 4 5 6 7 8 9 10
0.65% -0.86% 0.17% -0.40% 0.00% 0.04% 0.85% 0.14% -0.35% 1.28%

The final average here is that the closing price the date of purchase is 0.21% less than the average of the other days examined.

So by these statistics, the DRiPper actually gets somewhat of a break by making purchases through the plan, though I would not consider the number to actually be significant. I cannot tell whether or not these results will be replicated with other companies, but someone else may wish to look at their choice of company to see whether or not the stock price shows a significant variance before or after the company's purchase date.

The results here, however, confirm that making purchases through a DRiP do not necessarily result in paying more for the stock.

This website is maintained by George L Smyth