Procter & Gamble (NYSE:PG), one of the most popular companies among Dividend Growth Investing practitioners, made its quarterly payouts to shareholders last week. Woo-hoo! Each of my 398.901 shares was credited with a dividend of 60.15 cents, meaning I received $239.94 for walking my dog, playing golf, stuffing my face, watching Game of Thrones and sleeping.
As instructed, my broker used those funds to buy more of the company's shares - a practice known as dividend reinvesting, or "dripping." With PG priced at $79.50 at the time of that cost-free transaction, I received 3.018 additional shares. Three months from now, I'll receive dividends on my new total of 401.919 shares.
Lather, rinse, repeat, smile.
Procter & Gamble is trading near its all-time high, and pretty much every research method - including F.A.S.T. Graphs, as documented here - concludes that the company's stock is overvalued. I could have used my PG dividend proceeds to buy undervalued companies such as oil behemoths Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM), both of which are on my watch list.
Why, then, did I purchase more Procter & Gamble?
1. RUNNING WITH THE BULL.
Because PG already is one of my largest holdings, I am not spending "new" money on it. So dripping is the only way I'm going to get more. Momentum is a powerful force in a bull market, and I like that I'm making at least this small reinvestment in PG's considerable momentum.
2. DOLLAR-COST AVERAGING.
Although I strive to buy stocks on sale, I have purchased several companies at prices that might have been considered too high at the time, including Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Philip Morris (NYSE:PM) and Realty Income (NYSE:O). Today, my only regret is that I didn't buy more; those companies have gotten so darn expensive! Through dripping, I'm riding their momentum, too. Should their prices pull back in the coming months, their dividends will buy a greater number of shares - just as PG's divvies did during the 2008-09 market correction. It's textbook dollar-cost averaging.
3. DON'T SWEAT THE SMALL STUFF.
Had PG been priced at $60 the day my dividends were reinvested, it would have been a back-up-the-truck bargain, right? Well, $239.94 wouldn't even have bought one more full share at $60 than it did at $79.50. It hardly seems worth getting bent out of shape about paying "too much" for .981 of a share.
4. ERROR OF COMMISSION.
Had I used the money to buy Chevron or ExxonMobil, it would have bought fewer than two shares of CVX and fewer than three shares of XOM. Plus, I would have had to pay a broker's commission on the purchase. Some investors advocate receiving dividends in cash and then pooling that money over time to buy larger stakes of an undervalued company. For those with smaller portfolios, commissions could make a pretty significant dent in the bottom line.
5. SET IT AND FORGET IT.
Albert Einstein famously called compound interest "the eighth wonder of the world," "the greatest mathematical discovery of all time" and "the most powerful force in the universe." Well, we're pretty sure he would have thought the same about compounding dividends. The magic of dripping is that it is as easy as it is effective. In this complex world of ours, isn't it nice to make money while flying on autopilot?
6. SEEING IS BELIEVING.
A full 8.3% of my $32,000 stake in Procter & Gamble is the direct result of dividends received and reinvested back into the company since I initiated my position in June 2008. PG rewarded me for not panic-selling during the recession and again for not taking profits during market peaks. Watching my PG position climb from its meager beginnings has been satisfying. And while we shouldn't "marry" our stocks, nothing has happened in my five years of PG ownership to make me want a divorce - or to make me consider investing my PG dividends with another bride.
The best methods of dividend deployment is an oft-discussed topic in this corner of the Seeking Alpha universe. If David Van Knapp isn't the father of DGI, he certainly is its wise uncle; as detailed here, he believes in pooling dividends until enough cash is available to buy optimally valued stocks. So does prodigious SA contributor Tim McAleenan, who explains why here. Meanwhile, DGI guru "chowder" is a big dripper, and describes his rationale in this Instablog.
I never would claim that those who follow the lead of David or Tim are "wrong" and those who do as chowder and I do are "right." I merely offer this real-world example of my own experiences to stoke the flames of thought and conversation.
Disclosure: I am long PG, O, MCD, PM, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.