If you are a regular reader, I owe you a big congratulations on recent earnings from your dividend portfolio.
Some of you are consuming big returns. Others use dividend magnets for capital gains. Small group of savvy thugs profit from payments and price on the rise.
The result of your mini windfall, regardless of the source, is money. But this pile of money is not yet generating income for us. So what’s the best way to use those greenbacks? We have three options:
- Reinvest dividend money automatically via DRIPs,
- Deploy the benefits strategically via smart shopping lists, or
- Stack the dry powder for a special moment.
All three methods work. Really, there is no bad choice. I encourage you to consider the reinvestment plan that best matches your personality and simply stick with it.
Which one to choose? Consider the strengths of each.
Redeployment of dividend no.1: Automatically via DRIPs
Dividend Reinvestment Plans (DRIPs) are always a popular topic here at Contradictory perspectives. These plans provide us with an easy “pay and forget” way to reinvest payments we don’t need in our favorite dividend-paying stocks.
The idea here is that our extra income can be reinvested and create more income for us later. The appeal of a DRIP is that it does not require any monitoring beyond our initial choice of “DRIP”.
Traditional PRDs simply take your dividends and reinvest them in the stock or fund that issued the dividend. If your brokerage offers this option, it’s a great way to increase your future payment flow without thinking twice.
Redeployment of dividend no.2: Strategically via smart shopping lists
If you subscribe to any of my monthly dividend posts (Contrasting Income Report and Hidden returns), you will recognize this table:
At the end of each issue, we highlight the best revenue ideas for new money. These are the stocks and funds in the current portfolio that I plan to reward us with the highest total returns in the coming months (dividends more price appreciation).
This short list (from the June 2020 edition of CIR) worked very well. The yield on Synovus Financial (SNV), for example, is now less than 3%. Don’t worry, the dividend payout has remained the same and readers who reinvested money in SNV at that time are still getting a 6.7% return on their cost.
It was the stock the price which soared …
ONEOK (OKE) the yield also fell from 9.8% to “only” 7.3% today. But like SNV, the dividend was not reduced – the stock simply won.
The monthly shopping list assumes that your account isn’t automatically reinvesting dividends or adding new fresh money. It takes a bit more work to maintain than a DRIP because you choose the best places for reinvestment at that time – not just the stock that paid the dividend.
For many investors, this extra step is worth it. We are able to select the best dividend deals on the board and acquire more stocks when the prices are low (and the returns are high) of those promotions.
Then, as the prices start to rise, we can relax and enjoy the ride.
Dividend Redeploy # 3: stack the dry powder for a special moment
If you’re obsessed with market timing, here’s the bad news. The next market move (up or down) is usually a toss.
Now for the good news. It’s a weighted piece! Bear markets typically last for months while bulls run for years. In the long term, the direction of the market is up.
In addition, the best buying opportunities usually appear after a “bear refresh”. Of course, April 2020 comes to mind, but let’s not forget that October 2020 was also a step back which gave us a tremendous opportunity for a “double discount”.
In our October issue of CIR, we recognized that:
- The market as a whole had fallen about 10% from its recent highs.
- However, there were equity-focused closed-end funds (CEFs) that traded at a 15% discount to their net asset value (NAV).
- These NAVs were made up of high quality dividend stocks.
- So buying these CEFs in October is equivalent to buying the S&P 500 for less than 3000, whereas it was 3298 at the time.
Fast forward seven months, and we have the S&P 500 above 4000. It has increased by almost a third. And the two CEFs that we added in October CIR? They are also up by almost a third (including dividends).
The buying frenzy approach to dividend redeployment can generate outsized profits in a short period of time. We focus our purchasing power on the best dividend payers in the times when they are cheapest.
These moments, however, do not last long and many investors lose patience in waiting for them. But if you can bide your time, these great deals may be worth the wait.
Brett Owens is Chief Investment Strategist for Contradictory perspectives. For other great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.