DRIP (Dividend Reinvestment Plan)

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xcdq
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DRIP (Dividend Reinvestment Plan)

Post by xcdq »

I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
dbr
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Re: DRIP (Dividend Reinvestment Plan)

Post by dbr »

You should buy a low cost, diversified index fund and reinvest the dividends to the same end. All mutual funds allow that. You would build wealth as effectively but without the risk associated with holding a few individual stocks. Please read on "diversifiable" or "unsystematic" risk.
eazyigz
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Re: DRIP (Dividend Reinvestment Plan)

Post by eazyigz »

It is a great idea to use DRIP. It is best to do this in a Roth IRA (for maximum tax advantage). Also, IMO - it is best to pick stocks that have a price/earnings (PE) ratio greater than 20.
mega317
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Re: DRIP (Dividend Reinvestment Plan)

Post by mega317 »

Your idea is good--buy and hold, reinvest, build wealth. I agree you should use a diversified mutual fund instead of individual stocks.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
GAAP
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Re: DRIP (Dividend Reinvestment Plan)

Post by GAAP »

If you do this in a taxable account, the record-keeping requirements for tax purposes (i.e., to calculate basis upon sale) are something of a pain.

Multiple companies means multiple accounts, making any rebalancing effort more difficult. Those accounts are also something of a hassle for your heirs to deal with.

I would vote for a simple mutual fund or ETFs -- but more importantly, you should determine what your asset allocation should be, then worry about how to invest in it. I'm not too convinced that you're really ready to buy stocks.
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Re: DRIP (Dividend Reinvestment Plan)

Post by Grt2bOutdoors »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
I started out with DRIPs, but with the multitude of low-cost, low minimum diversified mutual funds available today in virtually any slice of the market on a global basis, my suggestion would be to forget about individual DRIPing and instead DRIP into an indexed mutual fund and/or ETFs. You can reinvest the dividends to acquire more shares automatically, and you can send in money at any time without being subjected to any sort of fees or having to wait for your money to be put to work as it may be with a DRIP. That is an excellent way to build wealth, if you toss in enough money you could be eventually making millions of dollars but it requires you to save and invest, no DRIP or mutual fund/etf is going to make your rich unless you continually throw money at it!

BTW, Enron offered a DRIP, ask the drippers in that plan how it all turned out for them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: DRIP (Dividend Reinvestment Plan)

Post by Grt2bOutdoors »

GAAP wrote: Sun May 06, 2018 7:48 pm If you do this in a taxable account, the record-keeping requirements for tax purposes (i.e., to calculate basis upon sale) are something of a pain.

Multiple companies means multiple accounts, making any rebalancing effort more difficult. Those accounts are also something of a hassle for your heirs to deal with.

I would vote for a simple mutual fund or ETFs -- but more importantly, you should determine what your asset allocation should be, then worry about how to invest in it. I'm not too convinced that you're really ready to buy stocks.
Heirs receive the stepped up basis, so what hassle are you thinking of other than to arrange for transfer of shares into their own brokerage accounts?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
livesoft
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Re: DRIP (Dividend Reinvestment Plan)

Post by livesoft »

Grt2bOutdoors wrote: Sun May 06, 2018 7:59 pmHeirs receive the stepped up basis, so what hassle are you thinking of other than to arrange for transfer of shares into their own brokerage accounts?
The hassle is that heirs delay doing anything with the DRIP stocks for years and years and then don't know what the basis of the shares are anymore. Or the heirs get sentimental about Dear Ol' Mom's stocks and decide to never sell them.

This comes up often enough on bogleheads.org that I think we can all categorically state that stock DRIP plans are a terrible idea, unless the custodian is just a regular brokerage account where one buys/sells shares just like they would buy/sell ETF and mutual fund shares.

Of course, ETF and mutual fund shares usually pay dividends which one can decide to reinvest, so there is really no point whatsoever to the obsolete and archaic DRIP of the 1960's and 1970's.

So just use mutual funds or ETFs to make millions of dollars.
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EyeYield
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Re: DRIP (Dividend Reinvestment Plan)

Post by EyeYield »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
Dividend Re Investment Plans were, once upon a time, the cheapest way to buy stocks.

Back when brokers would charge $100 to buy a stock or fund -sometimes on a $100 purchase - and there were no computers or such a thing as an Index fund, DRIP’s were a great deal. You could send a check to Coke and they would send you a stock certificate. Every quarter they would mail you a statement showing how many additional shares were purchased with the quarterly dividend along with an envelope to send in another check to buy more shares. The fees deducted were usually in terms of pennies, not dollars.

I too started out this way and although I transferred most shares to my current custodian, I kept a few shares in each stock so I could keep the original stock certificates - sentimentality.

By 1985, “Bogle’s Folly” had a ten year history and investors started to realize that this was no folly at all - and the rest is history.

So, as implied above, you can now buy 500 (or more) DRIP’s, without the clutter of 500 (or more) stock certificates, by buying the original “Bogle’s Folly”, the S&P 500 index fund.
And once again, the fees deducted are pennies, not dollars.
All that is required of you to reinvest dividends, is to click a little box in your brokerage account.

You can thank Jack!

If for some reason you like the idea of a physical stock certificate with a cool company logo on it, you can always pick one for the experience. But be forewarned, that piece of paper my become worthless. There are many, many, beautiful stock certificates on eBay - totally worthless, that can be had for a few dollars.
Search “Stock Certificate” on eBay to get an idea of how many investments went to zero.
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Re: DRIP (Dividend Reinvestment Plan)

Post by mighty72 »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
Done this. It is a great idea and works well. I am not worried about the tax implications too as most software will manage that for you. My real issue was with picking the 'right' stocks and sticking with them. As many have said, use index funds based on your risk profile.
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TD2626
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Re: DRIP (Dividend Reinvestment Plan)

Post by TD2626 »

DRIPs I believe were more important historically, when index funds didn't exist. DRIPs still exist and in theory a portfolio of a couple dozen in all different industries, bought and hold for decades, might work but it would be very clunky. Decades ago it was a traditional way to invest cheaply... but nostalgia aside low cost, broadly diversified mutual funds, bought and hold for decades, are much easier to manage these days and strongly preferred.
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Clever_Username
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Re: DRIP (Dividend Reinvestment Plan)

Post by Clever_Username »

Dividends and DRIPs were great ways to invest back in the era before fractional shares and commonly-available no-load low-expense mutual funds. Nowadays there's no reason not to focus on total return and the total market.
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Re: DRIP (Dividend Reinvestment Plan)

Post by nisiprius »

Before May 1st, 1975, brokerage charged fixed commissions. By modern standards they were almost unbelievably high. I don't remember the details but it sure looked like collusion and price-fixing, and either the regulations changed or, I think, they voluntarily changed in order to avoid being regulated. So during the 1980s you had the rise of the "discount brokerage," and then in the 1990s the emergence of the (even cheaper) website-enabled brokerages.

In the days of the fixed commission, the typical commission on a $5,000 stock sale or purchase would have been on the order of $100 to $150. Furthermore, if you were buying or selling less than 100 shares, your order went to one of two specialized firms that dealt in "odd lots" and charged an additional fee on top of that, that was hidden on the statement in the form of the stock price; that is, if the real price of the stock in round lots was $40 per share, your confirmation slip would show that you'd bought it at a price of $40 1/4 rather than $40. (Oh, all prices were in multiples of a eighths of a dollar back then, and all price quotes were printed using fractions just the way I did. Stock prices didn't get decimalized until 2001).

In short: it was prohibitively expensive to buy or sell stocks in small quantities.

The first "discount brokerages" often charged $29.95. That seemed dirt cheap at the time, you almost worried that it was too good to be true. When pioneering brokerages began making services available on the Web, they dropped to under $10.

Anyway: the crazy-high cost of transactions led to two strategies that were hugely important for small investor back then, and irrelevant today.

1) DRIPs. The only cheap way to buy small amounts of stock.

2) Dividend strategies for retirement income. The only cheap way to get small monthly payments from stocks was to choose stocks for their dividends. Portfolio design meant choosing stocks that paid quarterly dividends in different months and jiggering them so that they monthly payments were roughly equal.

So that's why older books are so enthusiastic about DRIPs, and I think some of the things that used to get said just get blindly repeated forever, even though at this point it seems to me to be decades out of date.
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Re: DRIP (Dividend Reinvestment Plan)

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donall
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Re: DRIP (Dividend Reinvestment Plan)

Post by donall »

SO was gifted DRIPS and did well with them. So we did the same. But during the last decade we were primarily in index funds with just a few holdover DRIPS. The DRIPS are cumbersome as the DRIPS may have separate accounts. Be aware that some DRIPS have high expenses,especially if the individual stock prices are low. And selling may not be instantaneous and have high selling fees.

Reinvestment is available for index funds, even for fractional shares. I would not recommend DRIPS for someone who is busy or has a family as everything is much easier, costs far less than before, and is automated with index funds.
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Re: DRIP (Dividend Reinvestment Plan)

Post by Church Lady »

Congratulations on deciding to invest, and to consider re-investing dividends.

These days, you can direct your mutual fund custodian or your broker to reinvest dividends for just about anything: fund, ETF, individual stocks, bond funds, whatever. My broker doesn't charge for this and I would be surprised if there was a broker that did. As required by law, your broker or mutual fund custodian will track basis for you unless it is something relatively exotic such as a PTP (publicly traded partnership).

Actual DRIPs are obsolete, but the principle of reinvesting dividends is sound and easy to implement without a DRIP.

Good luck!
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Re: DRIP (Dividend Reinvestment Plan)

Post by CABob »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.
It may depend on what you mean by a DRIP plan. As others have pointed out, DRIPs became somewhat popular when brokerage accounts, commissions, etc. were much different that they are today. The features of a DRIP can be incorporated into almost any brokerage account currently. So the "old fashioned" DRIP does not have the advantages and appeal that it once had.
But perhaps your question is should you reinvest dividends. That is a subject that has is often discussed on this forum and the Wiki has some guidance on it. Personally I reinvest dividends in my tax advantaged accounts but not in my taxable accounts primarily because the potential minor nightmare of keeping track of many small but frequent stock purchases.
Bob
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Re: DRIP (Dividend Reinvestment Plan)

Post by billfromct »

I bought Exxon & Texaco (subsequently bought by Chevron) back in 1992 through the company DRIP plan.

I'm simplifying my portfolio to my local credit union & Vanguard & have decided to sell my individual stock holdings.

I sold my Exxon stock in January & was charged a $70 ($69.88) "trading fee".

Don't use a DRIP (Computershare) to buy company stock, use Vanguard or another brokerage company.

Back in 1992 Vanguard did not the brokerage arm established yet. I guess I could have transferred the stock to my Vanguard brokerage account, but I didn't want the administrative hassel to do so.

bill
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Re: DRIP (Dividend Reinvestment Plan)

Post by rgs92 »

It's a pain at tax time to figure out cost basis and capital gains and even dividends sometimes.
It's the equivalent of an ESPP at work w/o the cost discount (employee stock purchase plan).
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Re: DRIP (Dividend Reinvestment Plan)

Post by GAAP »

livesoft wrote: Sun May 06, 2018 9:01 pm
Grt2bOutdoors wrote: Sun May 06, 2018 7:59 pmHeirs receive the stepped up basis, so what hassle are you thinking of other than to arrange for transfer of shares into their own brokerage accounts?
The hassle is that heirs delay doing anything with the DRIP stocks for years and years and then don't know what the basis of the shares are anymore. Or the heirs get sentimental about Dear Ol' Mom's stocks and decide to never sell them.
And those are individual accounts with different transfer agents. Each of those accounts requires a death certificate, the transfer agent's custom/unique form, and probably a medallion certificate to transfer ownership.
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Re: DRIP (Dividend Reinvestment Plan)

Post by bh7785 »

CABob wrote: Mon May 07, 2018 11:49 am
xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.
It may depend on what you mean by a DRIP plan. As others have pointed out, DRIPs became somewhat popular when brokerage accounts, commissions, etc. were much different that they are today. The features of a DRIP can be incorporated into almost any brokerage account currently. So the "old fashioned" DRIP does not have the advantages and appeal that it once had.
But perhaps your question is should you reinvest dividends. That is a subject that has is often discussed on this forum and the Wiki has some guidance on it. Personally I reinvest dividends in my tax advantaged accounts but not in my taxable accounts primarily because the potential minor nightmare of keeping track of many small but frequent stock purchases.
If just holding in a Vanguard Brokerage account, wouldn't this all be sorted out for you? That is, end of year you'll get a tax statement saying what the total dividends were, and the cost-basis would also reflect the updated totals?
NotWhoYouThink
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Re: DRIP (Dividend Reinvestment Plan)

Post by NotWhoYouThink »

DRIPs are appropriate for people with landline phones who write a lot of paper checks.
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Re: DRIP (Dividend Reinvestment Plan)

Post by anoop »

If one is making purchases on autopilot then it would seem that DRIP makes sense. OTOH, if one is looking for value (let's say we buy a stock only when it looks undervalued), then would it make sense to DRIP?

I'm asking this because I would not buy INTC at today's price, yet I have been buying it through dividend reinvestment and many of those lots are under water. At the time I made regular purchases, the stock was much lower and had a higher dividend %. This has me questioning if I should stop the reinvestment and sell the lots that represent dividend purchases. Also, is it normally possible to sell fractional shares or do those only get disposed when one is selling all shares?
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Re: DRIP (Dividend Reinvestment Plan)

Post by Trader Joe »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
I do not invest using DRIP's. I think the last DRIP that I saw was about 20 years ago (GE).
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Re: DRIP (Dividend Reinvestment Plan)

Post by nisiprius »

Fifty years ago DRIPs were excellent because buying stock cost in the ballpark of $100 in commissions, plus a nasty hidden "odd lot" fee if you bought less than 100 shares. It wasn't practical to buy microscopic amounts of stock with the dividends from existing stock directly, so DRIPs solved a real problem.

Nowadays, reinvestment in mutual funds involves checking one checkbox online. Correction: you don't need to do anything to reinvest, you only need to take an action if you don't want to reinvest. And, reinvesting or not, if you own an X fund at X's brokerage you can usually buy more of the fund in any amount desired, paying nothing in fees.
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rich126
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Re: DRIP (Dividend Reinvestment Plan)

Post by rich126 »

I agree with others regarding back eons ago when commissions were high, drips were ok. Back then I bought five: Texaco, Motorola, Bob Evans, Upjohn and Kelloggs. Not sure why I didn’t buy McDonalds unless it wasn’t offered. A few years ago I tried to figure my returns and it was a mess. Motorola terminated its drip a while ago. Texaco became Chevron and was my best buy.

Upjohn became a nightmare due to mergers and spin offs. I think it got bought by Pharmacia and eventually became Pfizer and somewhere in there Monsanto was spun off. I think when I sell the remaining ones that didn’t end the drip I will just use a cost basis of zero.

The one thing it does illustrate is that over a long time if a stock continues its dividends and increases them, then the current dividend actually is a large percentage of your original stock price. Chevron current dividend is $4.76. I probably bought it under $25 a share in early 90s. So on the original shares that is close to 20%, I think.
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Re: DRIP (Dividend Reinvestment Plan)

Post by Wakefield1 »

xcdq wrote: Sun May 06, 2018 5:52 pm I am thinking about buying stocks, and I was wondering if a DRIP plan is good. I've never bought stocks before.

The stocks I'm thinking about buying would be from big companies, like Coca-Cola, Starbucks, ExxonMobil, etc.

The DRIP plan sounds so good. It automatically reinvests your dividend payments to buy more stocks in the company.

It sounds like an excellent way to build wealth. Over time, because of the additional stocks being bought automatically, it seems like you could eventually be making millions of dollars.

It this as good as it sounds? Does anyone use DRIP? Should I use DRIP?
I used to do that,seemed like a good thing. At the time I had not heard much of diversification or the danger of a"good" stock failing.
I believe that Mr. Bogle for whom this web Forum is named specifically discouraged me from doing that when I was lucky enough to have crossed paths with him.
A good way to increase your specific stock risk. Better to have your stock dividends direct deposited to your credit union or bank,and then to move them to your favorite diversified mutual fund,even one that pays dividends if that is what you want. Of course dividends mean income tax. But hopefully at the "qualified" rate.
It's been a long time.
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Re: DRIP (Dividend Reinvestment Plan)

Post by Grt2bOutdoors »

rich126 wrote: Tue Aug 06, 2019 10:48 pm I agree with others regarding back eons ago when commissions were high, drips were ok. Back then I bought five: Texaco, Motorola, Bob Evans, Upjohn and Kelloggs. Not sure why I didn’t buy McDonalds unless it wasn’t offered. A few years ago I tried to figure my returns and it was a mess. Motorola terminated its drip a while ago. Texaco became Chevron.

The one thing it does illustrate is that over a long time if a stock continues its dividends and increases them, then the current dividend actually is a large percentage of your original stock price. Chevron current dividend is $4.76. I probably bought it under $25 a share in early 90s. So on the original shares that is close to 20%, I think.
The dividend yield on original shares of Texaco is higher than that. Prior to acquisition of Texaco by Chevron in 2001, Texaco effectuated a 2 for 1 stock split in 1997, then following the acquisition by Chevron, each share of Texaco you owned was exchanged for 0.77 shares of Chevron. In 2004, Chevron split the stock 2 for 1. Your effective yield is higher than 20%.

The same could be said for index fund shares too though. As the dividends increase, so does the yield on original purchase. No real need to use a DRIP today, only a few companies absorb the costs of purchasing and reinvestment.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
rich126
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Re: DRIP (Dividend Reinvestment Plan)

Post by rich126 »

Grt2bOutdoors wrote: Wed Aug 07, 2019 6:15 am
rich126 wrote: Tue Aug 06, 2019 10:48 pm I agree with others regarding back eons ago when commissions were high, drips were ok. Back then I bought five: Texaco, Motorola, Bob Evans, Upjohn and Kelloggs. Not sure why I didn’t buy McDonalds unless it wasn’t offered. A few years ago I tried to figure my returns and it was a mess. Motorola terminated its drip a while ago. Texaco became Chevron.

The one thing it does illustrate is that over a long time if a stock continues its dividends and increases them, then the current dividend actually is a large percentage of your original stock price. Chevron current dividend is $4.76. I probably bought it under $25 a share in early 90s. So on the original shares that is close to 20%, I think.
The dividend yield on original shares of Texaco is higher than that. Prior to acquisition of Texaco by Chevron in 2001, Texaco effectuated a 2 for 1 stock split in 1997, then following the acquisition by Chevron, each share of Texaco you owned was exchanged for 0.77 shares of Chevron. In 2004, Chevron split the stock 2 for 1. Your effective yield is higher than 20%.

The same could be said for index fund shares too though. As the dividends increase, so does the yield on original purchase. No real need to use a DRIP today, only a few companies absorb the costs of purchasing and reinvestment.
Thanks. I'll have to see if I have a spreadsheet where I was trying to figure this out a few years ago. I know I bought them all the same time and except for the dividends being reinvested, I don't think I ever added to them. At that time it was through some NIAP investment thing (I'm pretty sure I'm missing a letter or two in that acronym).

And one of the other companies (Monsanto?) shut it down recently and sent me a check so I think.
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Re: DRIP (Dividend Reinvestment Plan)

Post by Grt2bOutdoors »

rich126 wrote: Wed Aug 07, 2019 9:30 am
Grt2bOutdoors wrote: Wed Aug 07, 2019 6:15 am
rich126 wrote: Tue Aug 06, 2019 10:48 pm I agree with others regarding back eons ago when commissions were high, drips were ok. Back then I bought five: Texaco, Motorola, Bob Evans, Upjohn and Kelloggs. Not sure why I didn’t buy McDonalds unless it wasn’t offered. A few years ago I tried to figure my returns and it was a mess. Motorola terminated its drip a while ago. Texaco became Chevron.

The one thing it does illustrate is that over a long time if a stock continues its dividends and increases them, then the current dividend actually is a large percentage of your original stock price. Chevron current dividend is $4.76. I probably bought it under $25 a share in early 90s. So on the original shares that is close to 20%, I think.
The dividend yield on original shares of Texaco is higher than that. Prior to acquisition of Texaco by Chevron in 2001, Texaco effectuated a 2 for 1 stock split in 1997, then following the acquisition by Chevron, each share of Texaco you owned was exchanged for 0.77 shares of Chevron. In 2004, Chevron split the stock 2 for 1. Your effective yield is higher than 20%.

The same could be said for index fund shares too though. As the dividends increase, so does the yield on original purchase. No real need to use a DRIP today, only a few companies absorb the costs of purchasing and reinvestment.
Thanks. I'll have to see if I have a spreadsheet where I was trying to figure this out a few years ago. I know I bought them all the same time and except for the dividends being reinvested, I don't think I ever added to them. At that time it was through some NIAP investment thing (I'm pretty sure I'm missing a letter or two in that acronym).

And one of the other companies (Monsanto?) shut it down recently and sent me a check so I think.
I think the association is AAII but I could be wrong too. Monsanto was acquired by Bayer AG. They have ADRs but not common stock on US exchanges.
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Re: DRIP (Dividend Reinvestment Plan)

Post by CABob »

At that time it was through some NIAP investment thing (I'm pretty sure I'm missing a letter or two in that acronym).

I think the association is AAII but I could be wrong too.
I believe the organization was National Association of Investors Corp which now seems to be known as Better Investing.
http://www.betterinvesting.org/public/default.htm
Bob
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