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Monday, October 13, 2008
Some folks are happy with a 2% dividend.
This little-known income boost can make a huge difference. I call this strategy the "424 Dividend Boost" because companies that offer these plans detail them in prospectus-like documents called 424 documents. The technical name for these programs is "Dividend Reinvestment Plans" (DRIPs).
DRIPs are schemes where companies sell their stock direct to the investing public. It's like buying a pair of sneakers from a "factory direct" outlet instead of going to Foot Locker at the mall. The absence of broker fees is a popular benefit of DRIPs. By buying stock direct from the company, you avoid the commissions or fees brokers and money managers charge.
DRIPs offer many other benefits: discounted shares, automatic small monthly payments (even if the amount you pay buys only a fraction of a share), optional cash purchase of additional shares directly from the company, and automatic dividend reinvestment, sometimes at a discount.
DRIPs are a convenient, cost-effective tool for investing in stocks. But the real magic in DRIPs happens when you pick DRIP stocks that pay larger dividends each year.
Let's say you enroll in a DRIP. Shares trade for $10 each and you buy 100 shares. Total cost: $1,000. Let's say the stock yields 5% and the dividend does not grow. We'll assume the share price stays fixed at $10 for simplicity's sake.
After 12 years, your 5% dividend yield has turned into a 9% yield.
Now, let's assume this company grows its dividend by 10% each year. So the 5% dividend yield turns into a 39% yield within 12 years.
Financial data publishing firm Mergent releases a list of "Dividend Achievers" each quarter. Stocks with Dividend Achiever status have raised dividends for at least 10 years in a row. Out of 20,000 publicly traded U.S. stocks, around 300 meet the requirement for Dividend Achiever status.
Dividend Achievers are the perfect stocks to buy in DRIPs. They raise their dividends every year... They tend to be the strongest American businesses with the best franchises, like Johnson & Johnson or Altria... And right now – with the 30% plummet in the Dow in the last 12 months – is a perfect time to buy them for the long term.
You can buy Mergent's list of Dividend Achievers from Amazon. Pick the stocks with the highest 10-year dividend growth, enroll in their DRIPs, and hold them until you retire. The miracle of compound investing – the real secret behind 424 dividend boost plans – requires time. The longer you hold them, the better.
NEW HIGHS OF NOTE LAST WEEK
Volatility Index (VIX)... start selling options!
NEW LOWS OF NOTE LAST WEEK
Apple (AAPL)... iPods and computers
Boeing (BA)... airplanes
Cisco (CSCO)... networks
Disney (DIS)... entertainment
Energizer (ENR)... batteries
FedEx (FDX)... shipping
General Motors (GM)... the Chairman was right
Halliburton (HAL)... oil services
IBM (IBM)... technology
Johnson & Johnson (JNJ)... health care
Kansas City Southern (KSU)... railroads
Legg Mason (LM)... asset management
McDonald's (MCD)... fast food
Nokia (NOK)... cell phones
Occidental Petroleum (OXY)... oil & gas
Peabody Energy (BTU)... coal mining
Quest Communications (Q)... networks
Royal Caribbean (RCL)... cruise line
Starbucks (SBUX)... coffee
Teck Cominco (TCK)... base metal mining
United Parcel Service (UPS)... shipping
Visa (V)... credit cards
Walgreen (WAL)... drug stores
Xerox (XRX)... technology
Yahoo (YHOO)... search engine
Zimmer Holdings (ZMH)... orthopedic devices
Crude oil, Ethanol, Propane, Uranium, Corn,
Soybeans, Wheat, Copper, Lead, Nickel, Zinc, Cotton