DRiP Primer

Common Investing Strategies Using DRiPs

As with any type of investment, DRiP investors need to have a strategy with which to build their DRiP portfolios. While DRiP investing lends itself best to stocks that pay dividends – hence the name Dividend Reinvestment Plan – common strategies include a focus on income-generating stocks, growth stocks or stocks with a mix of growth and income characteristics.

Income Investing with DRiPs

This strategy involves focusing on dividend-paying stocks with higher-than-average dividend yields. It is typically more rewarding to focus on companies with high dividend growth rates than simply searching for the stocks with the highest dividend yields. Many times, stocks with very high dividend yields have those yields for a reason – most commonly because investors don’t expect the company to continue paying such a high dividend.

A portfolio concentrated on dividend-paying stocks generally should include a few solid, core dividend-paying stocks along with several stocks that operate in different sectors of the economy. For example, Altria (cigarette manufacturer) and AT&T are not going to grow very fast anytime soon. However, they both have a solid history of paying, and growing, their dividends and currently offer dividend yields above 5%. These two could be worthy of further research as core holdings in a DRiP portfolio focused on dividend-paying stocks. Diversification is important as well, so you should also consider which sectors of the economy you believe will perform the best in the future and search for solid, dividend-paying stocks in those sectors. Common sectors of focus include financial, health care, technology, consumer staples, transportation, telecommunications etc…

Growth Investing with DRiPs

Growth investing involves investing in companies that have exhibited above average growth in sales and profitability and are expected to maintain that growth for the foreseeable future. Growth stocks generally have valuations that are higher than the overall market, but also generally have dividend yields lower than average. While DRiPs are optimal for dividend-paying stocks, growth stocks can work as well. It is conceivable to think that at some future point, those growth stocks will begin to generate significant cash flow that could be used to pay a dividend. Microsoft is a good example as it used to be one of the fastest growing companies in America. Now, it growth rate has slowed and the company has begun to return its cash to shareholders with a dividend yielding more than 2.5%.

A portfolio concentrated on growth stocks generally should include a few solid, core dividend-paying stocks along with several stocks that operate in different sectors of the economy. For example, IBM (technology) and Tiffany (retailer) are not the fastest growing companies in the world. However, they both are considered “best-of-breed” in their particular industries and, as such, should continue to grow their earnings faster-than-average for the foreseeable future. These two could be worthy of further research as core holdings in a DRiP portfolio focused on growth stocks. Diversification is important as well, so you should also consider which sectors of the economy you believe will perform the best in the future and search for solid, dividend-paying stocks in those sectors. Common sectors of focus include financial, health care, technology, consumer staples, transportation, telecommunications etc…

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