The Prudent Investor

Letting Dividends Do Their Work

Most Recent Articles

The Dividend Discount Model for Dividend Investors – Part 1
The Dividend Discount Model is a means of valuing a stock price that is relevant to dividend investors because the theory is based on the sum of all of the stock’s future dividend payments. Part 1 of this article explains the formula and its shortcomings. The second part will speak to fixing those shortcomings and adding a margin of safety.
Future Dividend Champions - First of Long Island Corporation
With 24 consecutive years of dividend increases, First of Long Island Corporation is nearing the point where they will become a Dividend Champion.  It is time to examine it to see if it might be a good fit for your portfolio.
Future Dividend Champions - New Jersey Resources
With 24 consecutive years of dividend increases, New Jersey Resources is on the cusp of becoming a Dividend Champion.

Two Ways to DRiP - Part 1

by George L Smyth

There are a couple of good ways to be involved with dividend reinvestment programs, and one bad way.

When I originally started writing about dividend reinvestment programs for The Motley Fool twenty years ago there were three ways to get started with DRiP investing. The first means of doing this involved companies like BuyAndHold, which ended operations in 2015 and moved their clients to a folio investing solution.

I will not be covering folio trading in this series but will explain what it is, using Folio Investing as an example.

Folio trading allows one to create their own portfolio of stocks on the broker's platform. Folio Investing has groups of pre-selected portfolios that one can take as is, or can be modified to accommodate one's preference to weighting. Building a portfolio from scratch of specific stocks is also a possibility.

This does come at a cost. Folio Investing's least expensive plan sets one back $15 per quarter, plus $4 per purchase. The basic plan allows only three trades during the quarter, which is a problem for those whose strategy is to make multiple purchases each month. This limitation can be accommodated on their platform, but doing so moves one to the more expensive plan, which rockets the cost to $29 per month (or $290 per year).

As one who seeks to minimize costs (which is one of the real powers with dividend reinvestment plans), this just does not work for me.

The first way to DRiP that does make sense is to work through a broker, not something that would have been feasible years ago. This does not fit into the traditional mold of dividend reinvestment programs but achieves its goal in the same manner. For this example I will look at TD Ameritrade.

The TD Ameritrade website indicates that they offer everything the DRiPper seeks to accomplish. Their platform advertises fee-free purchases of stock, so multiple purchases of companies could be done each month. The company also offers a dividend reinvestment program without cost, so that barrier is reached. And finally, partial shares can be owned.

There may be limitations on these offerings that do not work. For instance, when making a purchase one needs to specify the number of shares as opposed to the purchase amount. This means that you cannot purchase fractional shares. If you wish to invest $100 and the share price is $51 then the $49 will need to wait for another day. That said, for the advantages TD Ameritrade offers, this is probably going to be an acceptable limitation.

At the time of this writing (10 Dec 2019) there could be a small catch. TD Ameritrade is going to be acquired by Charles Schwab. Although I could not find information anywhere on Charles Schwab's website, I spoke with a representative who told me that they do have an option to reinvest dividends and hold fractional shares, so this may not be an issue.

I have had experience with this in the past. I originally purchased stocks through a company (long forgotten) that was acquired by Zecco, which was then acquired by Ally. The reasons for selecting a company to do business with may not be transferred to the new company, so one simply needs to be aware of the situation and be ready to reevaluate their decision.

The second part of this article will deal with the more traditional means of participating in dividend reinvestment programs.


This website is maintained by George L Smyth