Leaky Faucet Investing

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