I have recently had my book Income for Life published, offering myriad income-generating ideas that absolutely anyone can use. The ideas run the gamut, from earning income from ordinary activities to making better investments. It’s all built around the core principal of generating more income for anyone. I’d like to share some of the 12 sections and 65 chapters with you.
One of my core investment themes is that you always want to have stocks that pay ample dividends — even if you’re not living off of the dividends. It demonstrates that companies put shareholders first when it comes to profits, not just paying management. And for growing your portfolio, re-investing dividends is one of the surest means of building wealth. They stack up month after month or quarter after quarter. They also help to carry a portfolio, even during more dour market times. Lastly, one of my favorite adages is that you never meet a man gone broke with regular checks coming in.
But reinvesting dividends isn’t just something to do willy-nilly. To get the most out of your dividends, I have some proven suggestions in my book, Income for Life. Read on for how to do it better.
Pay Attention to Your Reinvesting
You’ll do much better to reinvest on your terms rather than on autopilot.
Wall Street wants you to invest blindly. It really does. If it can get you to give it more cash regularly with no questions asked, all the better. That’s especially true if it can count on that cash coming in without having to deal with you over the phone or even online.
In fact, it’s really at the core of so much of the regular stock trading throughout the year. Think about it — for millions of Americans every two weeks when they get paid, a portion of their payroll check goes automatically to their 401k or other retirement plan. From there it gets shoveled into mutual funds and other automatic execution.
This not only feeds the trading desks and brokerage companies, it also feeds the trillions of dollars in funds that management companies need to make their fee income. And for companies — often the usual suspects from the S&P 500 that are the heavies in most individual investor accounts — they get a regular stream of cash buying more of their shares with no questions asked.
This really isn’t how you should want your investments to happen. Why would you want to put thousands of dollars into the market at arbitrary prices on arbitrary days when the market could be doing anything on those days?
Drip, Drip, Drip
This also is where dividend reinvesting comes in. Just like regular contributions to accounts – automatic reinvestment of dividends poses the same problems for you – while being great for the companies that get their shares bought willy-nilly and the same for funds or other dividend-paying investments.
This is why so many companies and funds as well as brokerages offer so-called DRIP plans that stand for Direct Reinvestment Plans or Dividend Reinvestment Plans.
DRIPs can be an easy pitch to make to investors that don’t want to be bothered with dealing with the dividend cash coming into their accounts. And for many investors that don’t yet rely on their dividends for regular living expenses – the idea of letting the cash help to build up their portfolios automatically is a compelling one.
But you can do better.
Know Thy Stocks
In each issue of my Profitable Investing I go through each and every portfolio holding and ask the following questions: would I buy it all over again and up to what price? If I can’t say “yes, buy it,” then it’s going to be reviewed as a watch or go to a full sell and move on.
This happens every month for every issue. And if something big happens in between issues, then I’ll send out an emailed alert telling you what’s going on, why it’s happening and what to do about it.
The same thing should be going on in your own management of your actual portfolio. Every month when you get your statements, you need to go down your list of holdings and do the same review — buy it again, review further or sell and move on. And by doing this — you’ll only get better and better at knowing your stocks and knowing when they are getting too expensive to buy or are on a great sale on any day of the trading week.
This is crucial for investing to avoid holding a company that’s really in decline, avoid missing selling one that’s reached its peak potential or know that you need to buy some more at better prices.
And it makes for a whole better way of reinvesting your dividends.
The stocks in Profitable Investing are focused on paying regular and higher dividends throughout the year. This means a lot of cash is coming in for those buying the same stocks for their own portfolio.
And if you’re not taking the cash out, then you need to reinvest it.
Doing it on autopilot by a DRIP or other automatic arrangement means you might not get the best deal. Over the long run, it can cost you some bigger returns by missing good buying times to re-invest as well as reinvesting at too high a price.
Instead, I want you to take your dividend cash and pile it up. Then keep an eye on your stocks and redeploy that cash when your stocks are on sale at better market prices.
This isn’t that hard, and you don’t need to be holed up in front of your computer all day. Just know your stocks and keep a general eye on them over the following days or weeks. All stocks will have down days that will provide you with great opportunities to buy more shares at better prices.
And by doing this — even with generally very stable-priced stocks — you can really bolster your returns.
A Great Example
Let’s look at a great example of reinvesting in a widely held dividend paying company with AT&T (NYSE:T).
The company pays its regular dividends four times per year — the first of February, May, August and November. Now, if you look at the graph below, you’ll note the trading has been pretty good throughout the trailing year.
I went through the dividends for the past 12 months when they were paid and compared it to taking the cash and giving the stock just 10 days and then buying at prices on some of those down days after each dividend was paid.
And the results are good.
AT&T Price History Source Bloomberg
If you take an investment of 1,000 shares with the dividends paid for each of the last four quarters at 51 cents, that equates to $510 each quarter. If you then reinvested automatically on the day of the dividend payment you would have bought 61.19 additional shares.
But if you took the cash and were mildly patient during the following days, there were plenty of bargain days. I took the lower prices in just the following 10 days and added up the reinvestment and I came up with 1.36 additional reinvested shares. That’s a 6.52% better total return for just four quarters alone over automatic reinvestment.
That adds up to real money — and more stock to pay you even more dividends as the years add up.
Bottom Line on Reinvesting
As you can see, with just a little more work by generally paying attention throughout the month, you can do this for a better reinvestment plan.
Now, better reinvesting of dividends is a really important thing to manage for more income, but it is just the very beginning of 65 income streams that anyone can get. And I’ve written them all up in a simple and engaging way that are easy to understand and follow.
For more information on my book, Income for Life, click here. It is nearly 400 pages of income-producing investment strategies for all economic conditions, as well as additional income producing ideas that anyone can use successfully.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.