Thursday, October 31, 1996
Be a DRIP and Beat the Dow
by LarFields

I've noticed that three questions are frequently repeated in the Beating the Dow folder: 1. What should I do with my dividends from the BTD approach?
2. How can I add money (regularly or a new lump sum) to a BTD portfolio before my anniversary date?
3. What is the best way to run several BTD portfolios during the year?

In my opinion, the most inexpensive and lucrative (but not the least complicated) way to accomplish all three of these is to use Dividend Reinvestment Plans (DRIPs). DRIPs get their name from the fact that, instead of receiving a dividend check from a company every quarter, DRIPs reinvest those funds in more of the company's stock. If the dividend is not enough to buy a full share, the DRIP will credit you the amount in fractional shares. Of the 30 Dow companies, 28 of them offer DRIPs (the exceptions are Disney and United Technologies).

Using DRIPs in a BTD portfolio offers many significant benefits:

1. The first screen used in choosing BTD stocks is the high dividend yield. It makes sense, then, to harness the power of DRIPs to realize compounded returns on one's dividends. A stock with a 3% yield would compound to 3.03% in the first year by reinvesting the dividends. Not much, you say? Well, if you followed the BTD strategy for 20 years, a constant 3% yield would compound to 181.8% after the 20th year.

2. Most DRIPs allow you to make quarterly, monthly, or weekly additional cash deposits to be used for the purchase of more stock. These are called Optional Cash Purchases (OCP). OCPs allow an enormous amount of flexibility in how much and when you add to or change your BTD portfolio. If you don't have a lump sum to invest, you could invest, say $25 per month, per stock. With 5 BTD stocks, you could invest as little as $125 per month and still follow the strategy. You could start right away, rather than wait to save up a lump sum amount.

Or suppose you received a $1000 bonus two weeks after starting your BTD portfolio. In the traditional method, you'd have to wait fifty weeks before investing your new cash. With a DRIP, you could buy more stock in the next 2-4 weeks. Your money would go to work for you almost immediately.

The best part about OCPs is that in many plans you buy new stock at very low or sometimes even *no commissions*. If you normally pay 2% commissions to your broker, you would, in effect be paying yourself an extra 2% every time you bought stock. What a deal!

3. Regular OCPs have the effect of running 12 BTD portfolios year-round. Of course, if you have no money in April because you have to pay the tax man, simply skip that month. DRIPs are very flexible in this regard.

4. Regular OCPs give you something called Dollar-Cost Averaging (DCA). DCA means that if you regularly invest the same amount of money, you will buy more stock when its price drops and less stock when it rises. The result is a low average cost for all your purchases.

5. By investing regularly, you get into the habit of buying no matter what the market is doing. You won't get scared out of the market during a crash and sell when prices are lowest. This is true long-term investing.

There are, of course, some disadvantages to DRIPs:

1. It takes time and patience to enroll in a DRIP. You must first purchase at least one share of the stock (Dean Witter charges a straight 10% commission plus a $2.35 transfer fee - much cheaper than even deep-discounters with their $12 or $18 minimum commission), get the stock certificate, and send in the enrollment card. This means you need at least three weeks to start your DRIP. (Note that you can purchase your first shares directly from TX and XON with a $250 minimum initial investment.)

2. The record keeping is a little more complicated with DRIPs. However, if you are already keeping records in Quicken or a spreadsheet, it really is no more complicated than any other kind of account.

3. Selling is a bit different with DRIPs. You cannot specify buy or sell prices or sell on any day you please, but rather at the market price on the specific sell date designated by the transfer agent in the DRIP prospectus. You do have a few options: a) in most plans, you can sell through the transfer agent, who will forward you a check. You do pay a nominal commission to the transfer agent for the trade; b) you can request a certificate for the full shares from the transfer agent, then sell through any broker you choose; c) you can open a margin account and sell short the number of full shares you have in your account at the same time you request the certificate. When you receive it, you can present the certificate to the broker to replace the shares sold short.

The selling part makes a BTD DRIP portfolio a little different from a regular BTD, because you probably would not want to sell, say ten shares every month for twelve months on every anniversary date. The way I handle it is this: I record my OCPs on a calendar, and sell a stock 12 months after my last OCP. In any case, I always keep the DRIP open so as to avoid the hassle and time delay when a company re-enters the BTD rankings.

Sure it takes time and patience, but the extra flexibility of a DRIPped BTD portfolio is worth the effort in this Fool's opinion.

Transmitted: 10/31/96