Live the FINER Life (Financial Independence Never Ever Retire) by Patrick J Keogh

Author:Patrick J Keogh [Keogh, Patrick J.]
Language: eng
Format: epub
Publisher: Highbridge LLC
Published: 2023-08-23T00:00:00+00:00

9

DRIPping: Compound Interest Turbocharged

This is one of the book’s shortest chapters, but it’s really important in your long-term planning to make your family rich. DRIP stands for Dividend Reinvestment Plan, and it’s the fourth of the nine principles of the MYFR system. Not all public companies offer the DRIP option, but almost all Dividend Champions have the plans. A DRIP is simply the opportunity to take your dividends as proportionate shares of additional stock. Most Dividend Champions pay dividends quarterly, and if you choose to DRIP a particular business, then on the dividend payment date, your account is credited with more shares of the company. No muss, no fuss. You automatically increase the amount of the great businesses you own.

Let’s say your quarterly dividend payment on a particular firm is $75, and the stock trades at $30 per share at the time of the dividend distribution. If you have chosen to DRIP your dividends, then you’ll acquire an additional 2.5 shares of the business. Notice that when DRIPping, you can acquire fractional shares of the company.

I love DRIPs. They come as nice surprises during the business day. You check your account midday, and there you have this neat little gift. Even when you remember a dividend is due, it still comes as a bit of a surprise. Hardly a week goes by that we don’t acquire additional DRIPped shares. Even if you aren’t actively selling puts—and maybe the market is climbing and what puts you have out aren’t striking—you’re constantly acquiring a greater interest in the Dividend Champions you already own.

Think about the effects of compounding when you are DRIPping. Dividend Champions are always increasing their distributions to you, the owner of the company. That’s what Dividend Champions do. Then add in the fact that you’re constantly adding to your ownership, and you see why we say that DRIPping is compound interest turbocharged. Over time and with increasing dividends, you’re buying an increasing interest in your businesses.

Perish the thought if you ever want to sell a Dividend Champion! But it could happen in the rare instance when a particular Dividend Champion fails to increase the dividend. In that case, we recommend a special way of disposing of the former Dividend Champion, as discussed in Chapter 10, “When and How to Sell.” If we have only a fractional share left at the end of the day, Ameritrade buys the fractional shares based on the closing price for the stock on that day.

Unless you need income, DRIPping is the way to go. Typically there are no trading or transaction fees, and some companies offer a discount off the market price when exchanging the cash due to you for the DRIPped shares. If you can afford it, fight the urge to take the cash dividends. DRIPping is too powerful a tool not to use.

With our brokerage firm, TD Ameritrade, we have a simple way of choosing to DRIP a particular business. We can select firms to DRIP and collect cash dividends on others. It is a simple click to DRIP or unDRIP as your circumstances change over time.

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