The Secret of Reinvesting Your Dividends
Want to know the secret to successful investing?
The secret is DRIP accounts or Dividend Reinvestment Plans that use the stock’s dividends to repurchase more shares for you without any extra charges. You gain more shares of your investment, without worrying about buying the stock whether stock’s price is cheap or not, another huge advantage of DRIPs over regular dividend earnings.
When stocks pay a dividend, shareholders receive a quarterly (sometimes bi-annual) sum of money, depending on the company’s dividend yield and dividend rate. The dividend yield is always changing, but the dividend rate remains the same until a firm’s board of directors agrees on a dividend increase.
To calculate the yield, we divide annual dividend per share by stock’s price per share.
When the stock prices falls, the dividend yield increases, and shareholders are paid with a larger cash sum with each dividend payment. On the other hand, the yield shrinks when a stock’s price increases, thus lowering the quarterly cash payment without altering the dividend rate.
DRIPs also reward investors during bear market situations when the general market talk is fairly negative.
Here’s an example to better clarify the positive effects of a bear market on your dividend-paying stocks.
Wal-mart (WMT) stock is currently hovering around $47 a share. If shares lost 50% of their value, then the share price would decline to around $23 to $24 per share, leaving most Wal-mart investors distraught and very upset.
Notice I mentioned “most” above because there will be a small contingent of investors who know exactly whats going on. The falling stock price allows Wal-Mart investors to repurchase more shares due to the dividend yield increase, and they actually end up owning more shares of the stock at a cheap price.
The Bear Market increased Wal-Mart’s dividend yield by 86%, which pays you twice as many shares than you were holding before. Now you can buy additional shares of stock a much lower price than before the bear market/price crash. Most importantly, your broker is repurchasing shares more shares at no cost to you.
This method only works for damaged stocks, not damaged companies. Investors rediscover damaged stocks, but they shun damaged companies. Always make sure your investment agrees with the former, not the latter.
Helpful resources on Dividend Investing: