Using DRPs: An Approach Focused on Value With Downside Protection
by Wayne A. Thorp, CFA
In this period of market instability, many investors are looking for shelter from the tempest.
One way to stabilize your portfolio returns is with dividends. Why? Remember that total return consists of price appreciation and dividend income, and while prices go up and down, dividend income tends 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 you to bypass a broker, and often the commissions they charge. With these plans, dividend payments immediately go to work for you with little or no transaction costs. [Our annual guide to direct purchase plans begins on page 13 of this issue.]
While DRP investing offers distinct benefits, these plans do offer unique challenges as well. By investing exclusively in companies with DRPs, you may end up with a portfolio overweighted in certain market segments, such as banks and insurance companies. 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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