Wednesday, May 4, 2011

Why You Should Always Reinvest Dividends (and 6 Income Stocks to Start With)

Generating cash is important, but put the funds back to work

I consider myself a fairly frugal person. I like cutting recurring expenses, which is why I drive a ten year old car and only have a discounted cell phone with the lowest plan possible. Saving money and investing in qiality dividend stocks is just one of the strategies I utilize to increase my dividend income. Cutting expenses however can only go so far however. That’s why generating extra income is so important to me. Besides the dividend income from my portfolio, I often look for brokerage deals in order to find brokerage bonuses or free trades. I also like teaching young people how to save and invest for their future.
Back in 2008 Sharebuilder had a promotion, where investors who put $50 in their account and executed one trade could earn a $50 cash bonus. I shared this deal with a young dividend investor who invested $40 in a real estate investment trust called Realty Income Corp. (NYSE: O), which pays monthly distributions to its shareholders. The company was well known for having raised distributions every quarter since going public in 1994. He paid a $4 commission on the trade and as a result generated a $0.20/month income stream from this small investment. He subsequently received the $50 cash bonus in a few weeks, which meant that he was essentially playing with the house’s money.
The investor did sign up for the dividend reinvestment program, which meant that each month these $0.20 deposits were automatically reinvested into additional shares. The company has another $50 promotion right now as well.
I had forgotten about this account, until I spoke with this investor when I was preparing their taxes for 2010. I noted that their monthly distributions had increased to $0.25. This was a cool 25% increase in dividend income for just 3 years, during one of the worst recessions since the Great Depression. With the automatic dividend reinvestment he was able to purchase shares in Realty Income during the worst market conditions, as well as throughout the market’s steady climb over the past 2 years.
Albert Einstein had once said that compounding of interest was one of the biggest wonders in the world. With dividend reinvestment, investors could take advantage of this compounding for wealth accumulation. In addition to that, by selecting companies whose stocks regularly raise dividends, investors could essentially turbocharge their returns in the long run.
For my 40+ positions I typically collect the dividend income until it reaches a certain threshold, and then I reinvest it secretly in the most attractive dividend stocks at the time of purchase.
Companies for long term dividend investment, which fit my entry criteria right now include:
Wal-Mart Stores, Inc. (NYSE: WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised distributions for 37 years in a row and has a ten year dividend growth rate of 17.80% per year. Yield: 2.80% Check my analysis of the stock.
The Coca-Cola Company (NYSE: KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristrcrat has raised distributions for 49 years in a row and has a ten year dividend growth rate of 10% per year. Yield: 2.80% Check my analysis of the stock.
Air Products and Chemicals, Inc. (NYSE: APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company has raised distributions for 29 years in a row and has a ten year dividend growth rate of 10% per year. Yield: 2.50% Check my analysis of the stock.
The Chubb Corporation (NYSE: CB) , through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company has raised distributions for 46 years in a row and has a ten year dividend growth rate of 8.30% per year. Yield: Check my analysis of the stock.
McDonald’s Corporation (NYSE: MCD) , together with its subsidiaries, operates as a worldwide foodservice retailer. The company has raised distributions for 34 years in a row and has a ten year dividend growth rate of 26.50% per year. Yield: 3.20% Check myanalysis of the stock.
The Procter & Gamble Company (NYSE: PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company has raised distributions for 54 years in a row and has a ten year dividend growth rate of % per year. Yield: 3.10% Check my analysis of the stock.
The moral of the story is to save a lot, buy quality dividend growth stocks at the right times and reinvest dividends when you can.

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