Boom! Watch out and get out of the way!! Do you see what’s coming? That’s the dividend income stream picking up more speed and size each and every step of the way. Today I want to talk about Dividend Reinvestment or Dividend ReInvesting Plans.
What is Dividend Reinvesting (“DRIP” for short)? This is when the dividends on your stock that you own pay dividends, become reinvested (at partial or whole shares) and are at no cost (hopefully) to you. I am lucky and all my brokerages give me the option to opt in or opt out of the DRIP plan, with no cost to reinvest to buy more shares. The benefits of the DRIP Plan are as follows:
Benefits to Dividend reinvesting:
- Mind-free investing: You do not have to worry about when to make an investment or that you forgot to pick up more shares
- Dollar-Cost Averaging: Typically, you are now about to pick shares up lower than what you initially paid for it . Obviously, one of the cons is that the stock could appreciate and be potentially overvalued. Thus your cost goes up on average
- Timing: You don’t have to worry about timing the market
- Cost: Most services offer the ability to reinvest dividends and pick up shares for free
- Income Increase: With the reinvestment into more shares, your income (barring the dividend doesn’t decline) goes up!
- Stream Effect: Those new shares now produce new income and that income, given the trend of a good company, may increase due to a dividend increase and then all your shares produce dividends to buy more shares. I think you understand the cycle I am explaining here : )
Cons to Dividend reinvesting:
- Increase in Avg. Cost: Your cost on average may increase if the share has gone through price appreciation
- Value: The shares you may be reinvested into may have a price that shows over-valuation in relation to their earnings. Therefore, your reinvestment may not be timed the best
- Cost: As it was a benefit above, some brokerages may charge a slight fee for this service. I would check with them first
Example of Dividend Reinvesting – Lockheed Martin
A great example of a solid DRIP stock from my time as an investor is Lockheed Martin (LMT). Initially, I purchased them in the upper $60 range back towards the end of 2010. The purchase was for roughly 29 shares, or $2K worth, and annual income of about $73. At the time they were paying a $0.63 per share per quarter dividend and the yield was approximately 3.65-3.75%. They began experiencing large growth and appreciation in the stock to go with it, but before year end of 2010 they increased the dividend from $0.63 to $0.75 or a 19% increase. I haven’t added any to my cost and the stock has undergone 3 more increases since then – 2011, 2012 and 2013 to the tune of 33%, 15% and 15.6%. I have reinvested all of my dividends since then, however.
With price appreciation and dividend increases, along with reinvestment, my total value of LMT is $5.4K! The annual dividend income has gone from $73 to $177 or 142% total growth since my annual income at inception. Very lucky and fortunate, of course. But I believe that in due time – that is the true power of dividend reinvestment, patience and why I choose to check the box “yes” for the DRIP option.
Anyone else have similar fortunes with dividend reinvesting? Are there any other pros and cons that I am missing? Here is to the next round of dividends and to reinvestment, enjoy!