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Individual investor with a focus on dividend stocks
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  • Drip, Drip, Drip...

    Yet another special case presents itself. My previous concerns about using a DRIP feature on stocks which are either a) too expensive, b) too high yielding, or c) too volatile, still hold true. An exception to my concerns involves stocks which pay dividends every month, instead of every quarter.

    This helps reduce my concerns on all 3 counts. The monthly payout means that I can respond more quickly and with less risk of overpaying if a stock quickly gains in price - any overpayment will be on 1/3 of the dividend income compared to a typical stock on a quarterly dividend schedule. Similarly the monthly frequency makes it easier to occasionally turn DRIP on or off if I want to contribute somewhat less of the income toward reinvesting that particular stock, as opposed to going into the general pool for any and all stocks. Finally the volatility problems that could cause that one day when the DRIP purchase occurs each quarter are greatly reduced then it is instead 3 smaller purchases over the same time period.

    So the bottom line is that for Realty Income (NYSE:O), a stock I recently purchased, where I would not have set it up for DRIP if it paid a quarterly dividend, I will do so since it pays a monthly dividend.

    I would go so far as to say that more dividend companies should consider moving to monthly dividend schedules. This would benefit their shareholders and their stock prices by encouraging more shareholder repurchasing from the dividend than they are seeing now.

    Disclosure: I am long O.

    Tags: O, dividend, DRIP
    Oct 10 10:42 AM | Link | Comment!
  • To Drip Or Not...

    I recently discovered (confirmation should arrive later this month) that my broker has a pretty nice arrangement for fee-free DRIPs. While I was already aware of the concept of Dividend Reinvestment Programs, I did now that I had such easy access to them.

    There are some obvious pros and cons to DRIPs. Reducing expenses by reducing or eliminating commissions. Removing choice of the timing of reinvestment (which could be either a pro or a con, depending on your point of view). There is also the issue of yield; all else being equal, a stock with a higher dividend yield will grow faster in a portfolio than a lower yielding issue. This would tend to separate the percentages of shares in both market value and income. As I wrote earlier, I favor trying to keep both of these things in somewhat of a bell curve distribution, and I can't say that I can favor causing that curve to grow wider (or increase in deviation) over time.

    Since I started buying individual stocks, I had been accumulating cash up to a certain amount, and then buying a small block of shares in whatever portfolio member seemed reasonable at the time. This is to try to keep commissions as an expense relatively low, and allow for some judgment as to exactly when to buy. But some expenses are still higher than no expenses, so I'm looking to see if I can improve over the current method.

    I am still not fully decided on a plan, but I am starting to settle on a couple of rules to use in forming a DRIP strategy:

    1) Keep high yielding stocks in check by turning DRIP off on them on a quarter-by-quarter basis, to bring the DRIP yield in line with the pack. Thus an 8% yielding stock would DRIP 2 of 4 quarters in a year, while a 4% yielder would DRIP for all 4 quarters. (Lower yielding stocks can't DRIP any faster than 4 times a year, so they would require a subsidy in the form of extra purchases, to keep pace with the pack).

    2) Keep lower beta stocks in DRIP, but DRIP high beta stocks less frequently, or not at all. Here the idea is simply that the greater price stability in lower beta stocks means that the autopilot purchasing timing of DRIP should not be at too unusual a price. Whereas manual control over buying decisions for the more volatile stocks seems wiser to me than hoping that the price on DRIP day is good.

    3) Don't overpay. Even for low beta stocks, the price can be too high. Certain consumer defensive issues come to mind. I'm a big fan of these companies, but so are too many other people these days. Better to turn DRIP off if one's instinct is the stock is overbought, accumulate cash, and wait for a better day to buy. I will probably keep a stock in DRIP more readily than I might buy larger blocks of shares outright, simply because the purchase sizes are smaller and thus the raise to cost basis smaller.

    So - pending confirmation that my broker's plan works as expected, and if I finally buy into the concept, I plan on activating DRIP for maybe 1/3 to 1/2 of the names in my portfolio. That percentage would be higher, but these companies are still a little too popular right now. Maybe this will change once QE tapering really starts being implemented.

    Jun 04 1:48 AM | Link | 2 Comments
  • Another Method For Weighting Your Dividend Paying Stocks

    Disclaimer: Things I am not going into here - purchasing criteria or rebalancing schedule. Nor buying or selling criteria. Also it is assumed that this is basically a buy and hold strategy. Nor is any sector analysis offered. This article is simply a statement of my current view on how to balance an income oriented portfolio of stocks.

    I and presumably many income oriented investors are faced with the choice of how to allocate their capital among their dividend paying stocks.

    My initial choice for a target rule was equal weighting, regardless of any other factor. So if I had decided that a particular stock was worthy of purchase, I would endeavor to buy enough to keep the market values of all stocks the same. A simple minded and easy to follow rule, but as I started to use it, I became nervous that it did not adequately address risk. Higher yielding stocks tend to also be higher risk ones. How many "risky" stocks should I allow myself to pick? How many "safe" ones? This rule gives no guidance.

    I have since considered a new idea, which is to try to keep the amount of dividend payout per quarter equally weighted, rather than the market value of the holding. One nice thing about this rule is that it naturally manages risk. It causes you to buy more of a lower yielding stock to bring the payout up to the line, and less of a higher "riskier" one. It also reduces reliance on the contribution of any one stock to the final income result. So if one of your companies has a dividend reduction or elimination, or you just want to sell it for some other reason, your portfolio results are no more reliant on it than on any other stock.

    Having said that, I am not advocating this as an absolute rule. My dividend payouts have a couple of outliers on the high and low sides. But there is certainly something of a bell curve shape if I graph them.

    This rule at least suggests that one should not load up on high yielders, nor stick solely to conservative stocks, but rather maintain the majority of your stocks at levels that keep their quarterly payouts at similar levels, while allowing for a small number of higher or lower paying stocks. So it is an improvement over my first rule in that it does offer guidance on when a portfolio is getting too risky or too safe overall.

    Granted that this does not in any way take into account dividend growth projections directly. All I would say there is that one can attempt to project a portfolio into the future, using antipated reinvestment and DGR, and use that as a basis for over or under weighting a stock which otherwise would receive a different level of investment based on the stocks current state. Then again, one can also just take the lazy route and simply adjust weighting whenever the portfolio is rebalanced. As a stocks dividend grows, it may find itself moving out of the bell curve, triggering either it or another stock to be rebalanced.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Apr 11 11:55 AM | Link | 1 Comment
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