Learn how to invest in DRIP stocks more effectively by considering these qualities of the top dividend-paying shares—and how they fit into your long-term portfolio
Top-quality stocks tend to lose less of their value in the kind of significant setback the market experienced with COVID-19 and then with all the volatility since then. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.
To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
As part of your investing, have you been wondering about how to invest in dividend reinvestment plan (DRIP) stocks? To participate in a DRIP stock program, you must first own and register one or more shares of the DRIP stock. For registration (through a traditional or discount broker) for a DRIP stock program, DRIP stock investors will generally be charged between $40 and $50 per company. Then you must contact the company offering the DRIP stock program to obtain the form you fill out to enroll in the plan.
Overall, we think DRIP stock investing is a good way to build wealth over a long period of time. But here are a few things to keep in mind about DRIPs:
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What is DRIP stock investing?
Dividend reinvestment plans, or DRIPs, are plans some companies offer to allow shareholders to receive additional shares in lieu of cash dividends. DRIP stock programs bypass brokers, so shareholders save on commissions.
DRIP stock investing also eliminates the nuisance effect of receiving small cash dividend payments. Second, some DRIPs let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many DRIPs also allow optional commission-free share purchases on a monthly or quarterly basis.
How do you enroll in a DRIP?
To enroll in a DRIP (Dividend Reinvestment Plan), typically you contact your broker, complete the enrollment form, and select which stocks you want to include in the program.
Meanwhile, you might consider synthetic DRIPS:
Synthetic DRIPs
If the process of traditional DRIP sounds like too much work, then there is another option that is much easier. The only catch is that you need more cash to get started. Synthetic DRIPs are offered by most discount brokers that will allow you to reinvest your dividends without being charged commissions.
However, there is a catch – the dividend received must be enough to purchase at least one whole share or the dividend will be distributed as cash. In other words, a synthetic DRIP will not allow you to purchase partial shares.
What are the advantages of using a DRIP?
DRIPs offer automatic reinvestment of dividends, allow fractional share purchases, often come with discounted share prices, eliminate commission fees, and provide a disciplined approach to compound investing over time.
What are the potential downsides of DRIPs?
Potential downsides of DRIPs include creating tax complications with multiple small purchases, requiring detailed record-keeping for capital gains calculations, potentially concentrating your portfolio in fewer companies, limited control over purchase timing, and possible administrative fees from some plans that can reduce returns.
Many investors select their stock market investments solely on the basis of the existence of the DRIP stock option. We think the availability of DRIPs is only a bonus, rather than a reason to invest by itself. Investing in only stocks that offer DRIPs limits both investment choice and opportunity.
The advent of the low-cost discount brokerage and online investing has reduced the commission cost of investment trades. Thus, the commission-free investing that DRIP investing allows is less of an advantage today than it was in the past.
Most companies that offer DRIPs provide details on their web sites. Another place to look for information is the inside back cover of most companies’ annual reports. You can also contact the investor relations department of companies you wish to invest in.
Look for these three traits while learning how to invest in DRIP stocks
Are you wondering how to invest in DRIP stocks to maximize your overall returns? You should look first at our dividend stock recommendations. Here are a few indicators of dividend quality we look for:
- High-quality, dividend-paying stocks should have a history of paying a dividend. One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common, and one you’ll want to seek out if you’re interested in DRIP investing.
- The best dividend stocks dominate their markets. We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.
- Be wary of dividend stocks with very high dividend yields. While they seem enticing for DRIP investing, they are often indicative of a stock that may soon cut its dividend rate.
Here are more characteristics that the top dividend-paying stocks share
The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.
The top dividend-paying stocks have the following characteristics:
- They provide regular income
- They are one of the dominant firms in an industry
- They feature hidden assets
- They are on high-quality, proven companies
- They operate a well-established business
- They have strong management
- They have manageable debt
Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.
A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.
What kind of experiences have you had with DRIP investing?
How much does a DRIP plan influence your decision on whether or not to invest in a stock?
