Drip. Drip. Drip. Leaky faucets can be annoying. Not to mention expensive. Some folks don’t worry about that leaky faucet or running toilet, because really, how much water can a drip cost? Well, over the course of several months or even a year, that ‘drip’ could be costing you hundreds of dollars.
What does that have to do with investing? Many companies reward shareholders by paying a dividend on the shares they hold, typically paying quarterly. So, if I own 100 shares of a company that pays, say 0.5225 per share, then I would receive a dividend check in the amount of 52.25, (0.5225 x 100 shares), 4 times a year. Just for owning their stock. Kind of like a profit sharing program.
Now, many of these same companies also offer a Dividend Re-Investing Plan, Or DRiP. By opting into this Plan, rather than receive a check, I would receive a statement showing the shares I own, the Dividend per share payout, and the amount I received. in this case, $52.25 That 52.25 would than be used to purchase additional company shares.
So let’s say that company had a share price of $50.00. That 52.25 would purchase 1.045 shares of that company, bringing my total to 101.045 shares.
Now here’s where it gets fun. The next quarter. I get paid the same dividend rate, 0.5225/share, only now, it’s being applied to 101.045 shares, instead of 100. Meaning the Dividend payout would now be 52.79. A whole 0.54 more than the last check. Big whoop right? Well, lets say the price of the company dropped a bit that quarter and the share price is now 45.75. That dividend payout has more purchasing power, and that 52.79 would purchase 1.1539 shares for a new total of 102.1989 shares. The following quarter sees a stock price of 51.73. At 102.1989 shares, our dividend would be $53.40, purchasing 1.0323 shares for a total of 103.2312. We close the year out with a stock price of $53.88. Furthermore, the div rate gets bumped up to 0.55. Our div would pay $56.78 and purchase 1.0538 shares for a total of 104.285 shares.
As you can see, we are being paid a share+ every quarter for a total of more than 4 shares per year. 2 years, 8+ shares. 3 years 12+ shares, and 4 years at 16+ shares. By year 5, our fractional shares would have rolled over and we would be +21 shares over 5 years, having never invested nothing more than the dividend payments. Over those 5 years we would hope to have seen several more dividend rate hikes, as well as, an increase in per share price. Where we were in the 45-50$ range, we would hope to be in the 50-55$, or even 55-60$ price range.
And in a nutshell, there you have the leaky faucet investment strategy. In 5 years time, our investment has grown by 20 shares and @ $55/sh, $1100 in price appreciation. A good company will have a consistent history with raising dividend rates, so we might now be receiving 0.58 / share.
While it might not seem like much, that leaky investment has made us over $1100, AND continues to earn. Not bad for doing nothing more than being a shareholder.
Thats Dividend Re-investing, or DRIP.
A.k.a. – Investing the leaky faucet way.
Written for DumDittyDo.com
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