Friday, 23 August 2013

Dividend Reinvestment Plans (DRIPs) and the Value Investor

1.  Dividend reinvestment plans (DRIPs) are often programs run commission-free by individual companies, enabling investors to regularly reinvest dividend payments in new shares and to increase holdings.

2.  DRIPs are useful to impose self-discipline for those otherwise easily distracted from adding principal to their investment resources - not a value investing trait but DRIPs can be attractive to value investors for their convenience.

3.  Dividends paid on account shares are automatically reinvested when declared, rather than paid to the holder.

4.  For regular dividend-paying companies, this can mean steady additions to equity securities.  

5.  DRIPs also typically offer holders the chance to have funds automatically taken from bank accounts at designated times to buy additional shares.

6.  Investors can set dates to follow paydays, creating additional discipline that yields substantial sums.

7.  A key benefit of the steadiness of DRIP funding is that dollars are invested at regular intervals, when price is below value and when above.

8.  If maintained over a long period, these discrepancies result in owning shares purchased at an average cost lower than the average of the prices on each purchase date.  Hence the term "dollar cost averaging."

9.  While certainly not pure value investing, DRIP's dollar-cost-averaging can produce impressive investing gains.  

10.  And there are value investing attributes of using DRIPs.

11.  DRIPs and dollar cost averaging reduce the number of decisions an investor must make.  

12.  They are also attractive because few stocks meet properly defined value investing criteria.

13.  Value investors monitor the fundamentals of the businesses and only take action to stop buying or to sell when preset fundamental factors have deteriorated to preset levels.  

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