Don't forget the magic of compounding!

I'm a big proponent of DRIP based investments. Through the brokerage associated with the bank I work at, I have my long term investments sitting, mostly high dividend ETF's.  Once I have that base build I'm moving my more active trades to TradeKing for the lower commission. (although I love the service here much more than at the other place.)

Lets say you have an entire portfolio strictly related to DRIP paying stocks and etf's.

You can easily average  a 6% yield among all those investments, some which pay out quarterly (compounding quarterly!!!), some which pay out monthly (even better!), and others of course yearly.   If there is no volatility in the market whatsoever, and no vertical movement, you make 6% the first year, and more after that on the same intial investment from compounding!  Can't lose with that!  With increased volatility comes the dollar cost averaging. Which technically should deviate around the mean, but in practicality can work to your favor.   on the upside it buys less shares, the downside it buys more, so you lose less when it falls, and gain more when it rises!

IT also provides some relief in down markets as well.

Thats why I like DRIP ETF's as well. they rebalance themselves every so often so you don't have to worry about one particular stock lowering its dividend, because the effect won't be felt as much by the ETF itself.


Thats why I like to have a big base of DRIP performing ETF's, with speculative stock picks as a smaller portion of the overall portfolio. (for the ultra long term investor (10+years)


Just my humble and untested investment strategy. Take everything I say with an extreme grain of salt cause I've only been investing since 2006, and have really only put a disciplined plan together in the past 5 months.(was pretty much testing the markets prior)

On a side note, do the trade numbers listed under people's names reflect dividends and/or drip?

you can put almost anything that pays a dividend into the Drip Program.

For example, an emerging market ETF I own is DEM-wisdom tree emerging market. about a 6% annual yield, pays quarterly. quarterly compounding! So I am always kind of praying that it will dip a few percentages when the dividend pays out so i get in at a lower cost basis.

Another example that I own is JNK (a little bit more risky), a high yield bond etf, has an 11% annual yield paid monthly.  Monthly compounding adds up quite a bit quicker.

I also own DVY(dow), IAE(asiapac), PFF(prefered shares), DEB (europe), and others, each that pay a great dividend.

with all those together, and depending on the allocation, you can exceed the 6%. My drip portfolio currently has a total average yield of about 9%. I've got some riskier stuff in there, (PFF and JNK, each which pay out about 11% yields)  and others. I gotta get IPE (tips) and DBC(commodities) in there soon to take a little of the risk away. Also thinking about incubus's recomendation of a shorting etf, although since im in for the long term, i don't know if I need that. I'm mulling it over.



A closed end fund to look at that I was referred to by someone on this forum was AOD and AGD.  they are closed end funds, but they pay high yields. great for DRIP as well. 

But then again, given the different distribution timelines, it adds even more importance on rebalancing your portfolio of securities onnce and a while to keep your allocation sound.

you cannot go directly to TK and buy .33 shares if I'm not mistaken.

If you were to buy the stock, had the DRIP plan and it paid a dividend, then it would reinvest and leave you with a fractional share.

in your example,you are correct.   lets say that the distribution is quarterly.

you have 1 stock at $10,  pays out $1 every quarter.

at the end of quarter 1, the stock price is at 12 dollars.   Therefore you would have 1 1/12 shares.

lets say it then falls back to 10.

you would be left with 10.83  instead of 11. (it it stayed at 12, then I would 13 dollars, and you would have 13 dollars)

But then the next quarter it closes at $8. and then it goes back up to 10. (if it stayed at 8 you would have 10 dollars, and I would have quite a bit less, don't feel like doing the math. So you're strategy reigns supreme if it stops here. However, the benefit comes on the jump.)


Once it jumps back to 10.
Then you would be left with  $12.08 using drip instead of just 12 using your strategy. The benefit comes from long time use. The real benefit comes if it just continuously rises and doesn't stop. because then every sent of my money is at work from the time I got it until I sell it all, where you have to wait to accumulate cash to purchase enough shares to justify the brokerage fee,, and then you  have to take the brokerage fee out.

now you would just have that cash sitting their depreciating, while my fractional shares would have still gained.

The dollar cost averaging theory assumes that you can't predict a bottom. ITs always safer to buy at specified periods of time over the course of a downtrend so that your average cost per share lowers for when the rebound hits.

If you can predict and buy at the bottom, and you are confident in your abilities to overcome the brokerage fee's, then your method would be better, only depending on how often you reinvest.

In the case I just noted above, you wouldn't beable to buy another share for years, while my money would have already rode the ups and downs and had been working for me the entire time..



Its best for stocks that you just let sit there. Don't have to worry about them nearly as much.