Investing in Stocks With DRPs: Adding Yield to Your Returns
by Wayne A. Thorp, CFA
Many investors get caught up in the daily fluctuations of stock prices and forget about the other element of stock investment returns: dividend income.
Total return consists of price appreciation and dividend income, and while prices go up and down, dividends tend to be steadier.
In this article
- High-Yield Screens
- Screen Performance
- Sector Breakdown
- Profiles of Passing Companies
- Passing Companies
- Conclusion
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A conservative, low-cost approach to investing in dividend-paying stocks is with dividend reinvestment plans (DRPs or DRIPs); particularly those that sell initial shares directly to the public (direct purchase plans, or DPPs/DIPPs). Direct purchase plans allow investors to bypass a broker, and also often the commissions they charge. With these plans, dividend payments immediately go to work for you with little or no transaction costs. [See page 15 for more information.]
If you are interested in dividend-paying stocks, DRP investing offers distinct benefits. However, it also presents unique challenges as well, such as tracking the purchase of DRP shares over time for tax purposes. By investing exclusively in companies with DRPs, you may end up with a portfolio overweighted in certain market segments. Focusing your investments on a limited number of sectors or industries can lead to a non-diversified portfolio with a rate of return that does not compensate you for your higher risk.
When used as part of a fully diversified investment portfolio, however, stocks with dividend reinvestment plans provide balance to more aggressive, high-growth holdings.
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