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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? / including... More
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  • A Note On DRIP (Jan 5, 2012) 8 comments
    Jan 5, 2012 5:48 PM

    Jan 5, 2012:

    I think DRIP is good for many small investor. A point against DRIP for dividend investor is that re-invested money are dead for typically 3 months (except few companies with mothly dividends), while money invested in another company might work early (e.g. if company X-date is tomorrow). Similar approach is sometimes named "dividend capture" investing but it is not for everybody.
    I rather use dividends to buy a new company then re-invest. Of couse dividends should be big enough and broker fees play against this approach

    March 25, 2013:

    Well I think we have nice contadiction between DGI from a mature company and DRIP in the same company. Let me explain:

    A a mature company generates a lot of cash. The mature company BoD conclude that cash retained beyond company needs is not a good idea. This is the reason it pay dividends to keep management from making poor decisions with "pets" projects.

    Now an investor in such mature company has choice to DRIP money back into the company or invest the money elsewhere.

    Actually BoD signals that an investor can utilize cash better than the company management. While a rational investor should chose DRIP? For a small investor DRIP might be good choice because it helps to avoid fees /but reduce diversification/. For not so small investor I do not see rationality for other investors in DRIPing back to a mature company.

    Any comment?

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Comments (8)
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  • David Fish
    , contributor
    Comments (9317) | Send Message
     
    I don't see a contradiction because DRIPping back into the mature company can create a positive (cash) feedback loop. In other words, since the mature company has signaled that it has reached a limit in terms of cash needs, it has effectively shown that any increase in earnings will be translated into higher dividends, rather than being subject to the possibility of being directed elsewhere. The more the earnings increase, the more the dividend increases an d the investor can reinvest...and because the increasing earnings is being looped back into the corporation, its value increases, which should be translated into an increasing stock price...creating a virtuous cycle. Each investor is now getting more of the profits AND the stock price is increasing.
    With the less mature company, the investor is receiving a dividend that may increase, but the increases are still subject to (limited by) capital requirements...so the feedback loop suffers from the drag of those frictional "costs" and is slower/less pronounced.
    26 Mar 2013, 08:13 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4472) | Send Message
     
    Author’s reply » David,
    Thank you for the comment.
    I presumed that a mature company saturated their market and freeze their dividends. So in this case DRIP is just single-compounding dollar-averaging game (due to number of shares increase).
    DRIP is double-compounding (due to number of shares and dividends increases) if a mature company is able increase dividends as you assume. But even in this case for reasonable DGR (and mature company probably cannot have high DGR) and not too high yield it seems me that DRIP is kind of dollar-averaging game.
    SDS
    26 Mar 2013, 06:05 PM Reply Like
  • David Fish
    , contributor
    Comments (9317) | Send Message
     
    One thing that you have to remember about DRIPs is that the shares almost never come from the company, nor does the cash being reinvested go to the company. So when the company-sponsored DRIP or a brokerage reinvests the dividends, the shares being purchased are generally bought in the open market and the cash goes to selling shareholders.
    So I guess my early comments about a feedback loop are mostly wrong. My dividend is going to a selling shareholder, who then is subject to a capital gain. I'm sure the IRS is happy to tax me on the dividend and the seller of my new shares on a capital gain...:(
    26 Mar 2013, 06:43 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4472) | Send Message
     
    Author’s reply » Well, Uncle Sam found another source of income. IMO his biggest source of income from the stock market is the limit on annual capital loss linked with inflation.
    27 Mar 2013, 01:25 AM Reply Like
  • David Fish
    , contributor
    Comments (9317) | Send Message
     
    I'm not sure what you mean by a limit on capital loss.
    27 Mar 2013, 10:11 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4472) | Send Message
     
    Author’s reply » US citizen can claim only 3K$ capital loss per year in taxes but there is no limit on capital gains.
    27 Mar 2013, 12:23 PM Reply Like
  • David Fish
    , contributor
    Comments (9317) | Send Message
     
    Yes, but at least the excess losses can be carried forward to future years, shielding gains until the losses are all used up.
    27 Mar 2013, 03:44 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4472) | Send Message
     
    Author’s reply » As I said the limit on annual capital loss linked with inflation gives Uncle Sam a free ride. Without inflation this rule is useless.
    28 Mar 2013, 12:42 AM Reply Like
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