Stock Dividends & Dividend Re-Investment Plan (DRIPs)

 

Basics

Picking companies whose stocks have a history of paying excellent dividends, a distribution of earnings to shareholders, is a good strategy for people who want a steady income.  Dividends are usually paid out quarterly.  If you are a long range investor, more than five years, and want to increase your portfolio, than re-investing your dividends through a DRIP (Dividend Reinvestment Plan) is an easy way to achieve this.  Note:  Dividends are taxable the year you receive them, even if you then use the money to reinvest in the company’s stock.


 

How to Find Companies With Good Dividends

  • Look for stock with a high dividend yield.  This is the company’s dividend expressed as a percent of the share price.  For example: If a stock is selling at $100, and pays $5 annual dividend, its yield would be 5% (100 ÷ 5 = .05%).
  • Find companies that have historically raised their dividends.  This is an indication of a well managed strong company.
  • You need a company that makes a profit in order to get a dividend. Look at the Return on Equity (ROE) number (see Stocks: Buying, Selling & Researching). ROE looks at net income to shareholders’ equity.  Look for companies with rising earnings. 
  • Larger more mature companies tend to pay more dividends.  However, look for the ones that have low debt levels.  To determine this look at the debt-to-equity ratio  al (see Stocks: Buying, Selling & Researching) so called debt ratio. 
  • If a company increases its dividends this would signal that management is optimistic about the company’s future profits.  It also would probably cause the stock price to rise. 
  • If a company decreases or eliminates dividends, it would signal that management is concerned about the company’s future.  This would probably cause the stock price to go down. 
  • Usually a company with one or two bad quarters will not reduce their dividend.  If they do, as mentioned above, they are probably in trouble.

 

 

Online Resource For information On Dividends


 

Dividend Reinvest Plan (DRIP)

Most dividends are paid out in cash.  A company will send you a check.   But if you do not need it right away, and you believe in the company, an excellent way to increase your portfolio is a program called DRIP, which stands for Dividend Reinvestment Plan.  This is also called automatic dividend reinvestment.   With this program you use your dividend check to buy additional shares in the company, i.e. reinvest.   In most programs you can also receive a fractional share, if the dividend does not cover the cost of a full share.   Generally you have to purchase the stock first to qualify for the DRIP.  To enroll you have to contact the company, either by mail or on their web site.  Typically this means completing an application and returning the completed form to the company.   People who use this program are generally in it for the long haul, a minimum of five years.   Some DRIP’s have minimum or maximum purchase requirements, so check the programs out before you sign up.


 

Benefits Of Investing In A DRIP Program

  • Since dividends are paid out quarterly, you receive additional shares every 3 months.  You will also receive quarterly notification of shares purchased.
  • In most programs you can also receive a fractional share, if the dividend does not cover the cost of a full share.
  • This is an inexpensive way to purchase additional shares. In most cases DRIP plans either have low or no fees attached to purchasing the additional shares.  Some companies even offer these shares at a discount.


 

Online Resources For Information On DRIPs