A Dividend Reinvestment Plan (DRIP) is an opportunity offered by some public companies where in lieu of a cash payout you can automatically have your dividends purchase additional shares of the same stock directly from the company. There are a few good primers here and here. This article will narrow the focus down to the BDC universe and specifically look at whether it is better to stick with a BDC through a DRIP or to take the money and run.
The companies to be examined for this article will be American Capital (ACAS), Apollo Investments (AINV), Ares Capital Corp (ARCC), Blackrock Kelso Capital Corp (BKCC), Kohlberg Capital (KCAP), Main Street Capital Corporation (MAIN), PennantPark (PNNT), Prospect Capital (PSEC), Solar Capital (SLRC) and Triangle Capital Corp (TCAP). This list has an old company (like ACAS), a larger number of "seasoned" companies (AINV, ARCC, PSEC) and a new BDC (SLRC). With the substantial losses over these past few weeks involving the market and these stocks in general, I thought it would be interesting to perform a study on whether to reinvest or not.
- I picked a list of BDCs that I mentioned in my previous article and gathered their returns for the week of Aug 15-19th, 2011.
- Next I picked another set of intervals for comparison. The set intervals were 'Since Stock Inception', '5 Years' and '2 Years'. If a stock has not been listed for more than 5 or 2 years, I put "N/A" into the fields. The reason for choosing these intervals is to compare BDCs across meaningful intervals. Inception is interesting as it shows the returns since the company was listed and gives you a complete idea of the company's performance over its lifespan. The 5 Years interval shows how someone who bought at arguably the peak of the market is faring today and the 2 Years interval shows how someone who managed to buy during the 2009 market recovery is doing. The main sources of my data are Google Finance, Yahoo Finance and Daily Finance (if you have a Bloomberg Terminal, the collection is MUCH easier, but I went the free route).
- Then I set up a calculation for Total Return. Total Return = Holding Period Return + Dividends paid out. There are two variations to this formula below:
- The first variation is the plain vanilla case where you bought $10,000 of the stock at the beginning of the period and collected the dividends for the period without reinvestment. So the number of shares held is the same at the beginning and the end.
- The second case is where the dividends are reinvested. This is where it gets a little tricky because the date of reinvestment matters for the price paid for the stock and that figures into the returns. The general formula is still investing $10,000 at the Beginning of the Period and at the end of the period, your Total Return is based on the Current Number of Shares * Current Price. NOTE: In cases where I could not pull in the Pay Date of the dividend, the calculation sets the reinvestment price = Ex-Date price.
- Finally, I ran this test for the above mentioned companies and produced this chart. Click to enlarge:
Results Overview and Limitations
The cell that has the better return for each time frame is highlighted in bold. As you can see above, the results are mixed. ARCC stands out as it is the only stock that has been around for over 5 years that has had a positive Total Return whether you reinvested dividends or not, and there is a clear benefit to reinvesting dividends in that stock. Of the other stocks, TCAP and MAIN stand out as having no negative return periods since their inception.
There are a few limitations to this study which should be noted. The first limitation is that this study assumes there are no taxes involved. Taxes on Capital Gains and Dividends would change the above results as most of the company dividends would be taxable income as opposed to being classified as a Return of Capital. Another limitation is that the model did not allow for selectively reinvesting (DRIP in some periods and not others). Finally, I did not break down the returns into different components so you could see at which point in the period the return was generated (was it front/rear-loaded or was it spread out throughout the period).
In this study, I evaluated 10 stocks and of those 10, 7 of them provided investors with a superior return by using a DRIP. The other three stocks each have had a significant event(s) (ie ACAS suspends dividend, AINV's Innkeeper's Bankruptcy and PSEC: One Year Later) that have hurt the stock price such that it has not recovered. It is worthwhile to note that the three stocks that have not been worth reinvesting are the three oldest BDCs in this group (ARCC debuted 3 months after PSEC).
When I started this exercise, I was hoping to find a clear benefit in one direction or the other. Given the above results (a 30% chance your reinvestment plan may fail), the best course of action is as always to stay vigilant and stay up to date with your portfolio.
Disclosure: I am long AINV, ARCC, PSEC, TCAP.