How to Maximise Your Profits with DRIP

Dividend Reinvestment Plan, or DRIP, is a plan that allows the investor purchase additional or fractional shares of the company they invested in with the dividends paid. A look at how to maximise your investment profits with DRIP.

Dividend Reinvestment Plan, or DRIP in short, is a plan allowing investors to use the dividends received from their portfolio to buy additional shares or fractional shares on the dividend payment date. Brokerage firms usually charge little or no commissions for such purchases.

Let us take a look at the opportunities of enrolling in DRIP.

Benefits of DRIP

There are lots of benefits of DRIP that an investor can reap by enrolling in the program

  1. Saving on commission. Many brokerage firms offers the purchase of the additional or fractional shares at little or no commission. The low or no commission allow the investor to increase their portfolio without having to worry that their profits will be reduced by the commission.
  2. Starting small. As the saying goes “Better to start early than never“. This is especially true in investment. Many people claim that they would start their investment whenever they have enough cash or when they have a windfall. The smarter investor will try to put their money to start working, no matter how small the amount is. Enrolling in DRIP increases the investor portfolio. Though it may be a fractional of a share, this investment will eventually reap more profits.
  3. Automation. One of the most important point why enrolling in DRIP is beneficial to an investor’s portfolio. Unless you are very disciplined, most of the people will tend to spend “what is there” and the dividends paid out will very soon be spent. When the dividends are automatically reinvested, the possibility of spending the dividends is immediately reduced to zero.

Let us take a look at how DRIP helps to maximise your profits using Visa Inc. (NYSE: V) as an example.

Visa pays out a quarterly dividend. Assuming an investor starts off with 100 shares of Visa in March 2012, before the Ex-Date of the March payout, by the end of the last dividend payout in December 2014, his portfolio would have been worth $553.73 more if DRIP was enrolled.

DRIP Comparison | Investor Monkey

Why not do it?

If enrolling in DRIP can help to increase the profits of a portfolio, why then do people not enrol in it?

  1. Not knowing the existence of DRIP. Some investors, surprising, do not know the existence of the program.
  2. Not appreciating the profits. Without looking at the benefits in detail, the profits from the program cannot be appreciated.
  3. Diversification. By reinvesting the dividends back to the same company will have its own risks. By taking the dividends and personally reinvesting it in future can allow the investor to reinvest the dividends in other companies to diversify their portfolio.

Bottom Line

The true benefits of DRIP can only be realised for long-term investments. If your portfolio is targeted at growth stocks, it might be better to better for you to take the dividends and invest them in other stocks or wait till the stock price of the company is more attractive before you reinvest.

Trading Update (November 2015)

One month past very fast after I started my Forex trading. A simple update on how my Forex trading is doing while I am still thinking of how to present the trading results in future.

Starting off in November, I will be doing some trading (see reasoning here). This post shall be the first update on my trading journey. As I have not given a thought on how should I present my results from my trading, the formatting shall be firmed up while I go along.

My Initial Investment

After thinking through and making some calculations, I decided to invest $5,000 into trading Forex. I have opened an account with Oanda, made the transfer of the funds and started off my trading in Forex again.

Journey So Far

My trading journey in Forex did not start off in a good way. Made a couple of small mistakes and lost around $100. However, the “killer” was two of my trades in NZD lost around 750 pips each!

I had some good trades profiting a total of around 1,350 pips but because I was only starting off, I trading with only 1 micro lot which meant the profit was around $135. Just when I upsize my trades to 0.5 mini per lot, I lost the two “killer” trades which not only returned the profits in the start, I was down by $615.

After the loss of the two “killer” trades, I had a series of losing trades while trying to “revenge” the market by trading on the hourly and below timeframes. Very soon my account was down by $1,500.

The Bottom Line

After the two “killer” trades, I total lost my sight of my trading plans and started to go back to the trading pattern which cost me dearly in the past. Luckily, or unluckily, I had managed to see the problem fast and it did not wipe out my entire initial investment. Shall remind myself of the trading plans and restrict myself in doing “revenge” trades again.

Portfolio Update (November 2015)

While the Fed are still deciding if they would want to raise interest rates, investors and traders are now sitting on the fence to wait for the decision. Markets have rallied a little in November but slowed down nearer the end of the month as the expected date of the Fed announcing their decision creeped nearer.

While it has become more likely that the Fed will be increasing the interest rates, some stocks began to rally. As the day crawls closer to December 16, 2015, the day when Fed is supposed to announce a rate hike, price movement of the stocks in my portfolio started to slow down as investors and traders started to wait for the announcements before putting money into the equities market again.

Dividends

Clorox Co (NYSE:CLX) paid dividends amounting to $3.08, before tax, on November 13. The dividends had been converted to 0.0177 worth of shares at $121.8798 per share via DRIP

Abbott Laboratories (NYSE: ABT)  paid a dividends amounting to $2.64, before tax, on November 16. The dividend had been converted to 0.04170 worth of shares at $44.3976 per share via DRIP.

Stock Symbol YTD Dividends
Home Depot, Inc. HD $2.36 0.49%
Johnson & Johnson JNJ $3.75 0.74%
Automatic Data Processing, Inc. ADP $2.94 0.62%
Clorox Co CLX $3.08 0.67%
PepsiCo, Inc. PEP $0.00 0.00%
Abbott Laboratories ABT $2.64 0.53%
Total Dividends $14.77 0.51%

Total dividends paid till end-November is $14.77 or 0.51% of my total portfolio size.

Stock Holdings

Stock holdings as of November 30, 2015. Cost basis is the total invested amount, including dividends that were reinvested and the commissions and taxes paid. This cost will be used in the percentage calculations for YTD dividends, and profit and loss.

Stock Symbol Shares Cost Basis
Home Depot, Inc. HD 4.01400 $480.55
Johnson & Johnson JNJ 5.02812 $509.59
Automatic Data Processing, Inc. ADP 6.02550 $476.12
Clorox Co CLX 4.01770 $459.89
PepsiCo, Inc. PEP 5.00000 $471.74
Abbott Laboratories ABT 11.04170 $494.21
Total Investment Amount $2,892.10

Profit & Loss

With traders and investors feel that the Fed will be raising the interest rates for the first time over a decade, stocks began to rally and my portfolio all closed positive on the last day of November after some of the stocks slides in and out of the red zone a few days in the month.

Home Depot (NYSE: HD) traded on a nine days winning streak, and the rally stopped on the last day of the month. The stock traded at a all-time high of 135.47 on November 27, 2015.

Stock Symbol Profit/Loss
Home Depot, Inc. HD $57.24 11.91%
Johnson & Johnson JNJ $0.56 0.11%
Automatic Data Processing, Inc. ADP $43.64 9.17%
Clorox Co CLX $39.51 8.59%
PepsiCo, Inc. PEP $29.16 6.18%
Abbott Laboratories ABT $1.78 0.36%
Total Profit/Loss $171.90 5.94%