FYI | Apr 09 2014
By Peter Switzer, Switzer Super Report
Intro: Dividend reinvestment plans are a great way to boost your investments over time but you just need to find the right ones.
I want to share with you the greatest, real life, normal person story I have ever come across and one that underlines my overall approach to making money out of stocks. It is the story that makes me welded on to my core strategy of building wealth inside my SMSF. I wish I had heard this story when I was 20 or 30 years of age instead of when I was looming in on 50!
In 1995, Anne Scheiber, aged 101 years of age, died in New York City in a rent-controlled apartment in Manhattan, no less. The place was a mess; nothing short of a dust-laden hovel, a consequence of a hamstrung landlord and an old lady living on social security and a small monthly pension.
Anne Scheiber had been an auditor with the IRS — the US tax office — and had retired in 1943 but, like a lot of us, she lived longer than expected. However, Anne made do, was thrifty, and didn’t lash out on clothes and furniture. She didn’t even subscribe to a newspaper, instead she’d go to the public library to read The Wall Street Journal.
Slow and steady
So how did Ms Scheiber leave the Yeshiva University $22 million in her will?
When she left the IRS, she’d saved $5,000, which she ‘ploughed’ into stocks. After five years, she took her profit and bought 1000 Schering-Plough Corporation stocks for $10,000. By the time she died, those stocks were worth $7.5 million and there were 128,000 shares in her portfolio.
She did not get spooked by the ups and downs of the stock market because she was a long-term investor in quality companies. She would have been buying when others were selling after crashes and corrections because she understood something called the Law of Process.
Anne was also a reader of quality market information but she used it in conjunction with her strategy, which was her investment process – quality companies + dividend reinvestment = long-term wealth.
Dividend reinvestment plans
This story instantly sprung to mind when my team asked me to look at DRPs or dividend reinvestment plans. I think they’re great ideas but you need to stick to quality companies. Dud businesses can give DRPs a bad name.
In case you didn’t know, DRPs permit shareholders to take part, or all, of their dividend in the form of additional shares rather than cash, with no transaction or brokerage costs. There can be discounts but they are pretty scarce nowadays.
The pluses are that it helps the companies’ cash flow and helps shareholders resist the temptation to not buy when market negativity drives share prices down. Many Aussies bought CBA in the $20s during the GFC because of their DRP selection!
The big negative is if the company is a poor performer and you have wasted a good dividend.
Find the quality company connection
I recommend that you think carefully about DRPs and make sure they’re connected to quality companies. At the end of the day, I like the idea of at least 20 stocks in a portfolio and if they’re all good dividend payers, with a DRP connected to them, that would be a solid investment strategy linked to a good process.
That said, if you can only find 10 good’uns, then you could DRP them and reinvest the dividends from your other less reliable companies in the more reliable ones.
But of course, it would be ideal if you weren’t in any unreliable companies, however, you know what happens in the stock market.
If your processes are solid and you stick to them, then you cope with the ups and downs of the market and, undoubtedly, a DRP in a quality company is a damn good start.
If you need proof, look at the CBA’s dividend story below:
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If you need convincing about dividends, have a look at 2007 to 2010, when the GFC was hitting and hurting companies.
The June 2008 dividend was $1.53 but the June 2009 dividend dropped to $1.15 and then bounced back to $1.70 in 2010! So it averaged $1.46, which was only three cents less than the 2007 dividend and 16 cents more than the 2006 result.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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