Skip to main content

Using Dividends to Improve Returns

On May 21, I posted some important information about stock dividends (which includes dividends paid by ETFs). But there is an important point to be made for investing in dividend paying stocks. It's the same as compound interest on savings.

Phil Town calls it Payback Time. The basic premise is to re-invest dividend payments from stocks to reduce the overall cost of ownership. If you hold the stock long enough (not always possible), eventually your cost is zero.

Let's look at a real example using AT&T (T). The information here is based on actual data from Yahoo's finance website.

We purchase 500 shares on June 5, 2014 for $35.02 a share. This is an investment of $17,510, which is also called our basis. We also make sure to instruct our broker to reinvest all dividends by buying extra shares, which will be purchased at the market rate, usually the day after the dividend is paid.

We are actually going to buy extra shares without using our own money. We will use the dividends paid by the company.

The average price of AT&T over the last five years has been about $35 a share, so at today's prices, the stock is a little less expensive. We might consider that it is selling at a discount. Morningstar gives it a fair value of $37 a share, so our current holding looks safe. We'll continue to collect dividends and add shares to our position. In another five years, our dividend income should be up to at least $1,800 a year. 

You can't retire on this investment alone, but it's a start. If you build a portfolio of 5 or 6 dividend paying stocks (look for companies that have a record of raising dividends each year), it will keep growing faster as time goes on. Keep adding to your positions on a regular basis, especially when prices are low. 

As of June 6, 2019, the value of our AT&T stock is $21,049.99. We currently own 655.76 shares, because we purchased an extra 155.76 shares by reinvesting the dividends. So even though the price per share of the stock is down about $4 per share, the value of our stock has increased $3,539.99, a 20 percent increase. This will not make you rich, but over time, especially if you've put the stock in a tax-free account, such as a Roth IRA, the gains you make are tax free and will grow faster as time goes on.

The chart below details the numbers. This should be considered a long-term investment. Take a look at the company a couple of times a year to make sure it's still something you want to own. 

Ex-Date Div/Share Close Price Dividend #Shares Total Shares Market Value
7/8/2014 0.46 35.56 230.00 6.47 506.47 18,010.00
10/8/2014 0.46 35.15 232.98 6.63 513.10 18,035.32
1/7/2015 0.47 33.17 241.16 7.27 520.37 17,260.55
4/8/2015 0.47 32.65 244.57 7.49 527.86 17,234.53
7/8/2015 0.47 34.74 248.09 7.14 535.00 18,585.84
10/7/2015 0.47 33.12 251.45 7.59 542.59 17,970.60
1/6/2016 0.48 34.06 260.44 7.65 550.24 18,741.07
4/6/2016 0.48 38.64 264.11 6.84 557.07 21,525.27
7/8/2016 0.48 43.10 267.39 6.20 563.28 24,277.21
10/5/2016 0.48 39.16 270.37 6.90 570.18 22,328.27
1/6/2017 0.49 41.32 279.39 6.76 576.94 23,839.25
4/6/2017 0.49 40.60 282.70 6.96 583.91 23,706.56
7/6/2017 0.49 37.18 286.11 7.70 591.60 21,995.71
10/6/2017 0.49 38.59 289.88 7.51 599.11 23,119.76
1/9/2018 0.50 37.49 299.56 7.99 607.10 22,760.29
4/9/2018 0.50 35.17 303.55 8.63 615.73 21,655.36
7/9/2018 0.50 32.15 307.87 9.58 625.31 20,103.71
10/9/2018 0.50 33.50 312.65 9.33 634.64 21,260.53
1/9/2019 0.51 30.10 323.67 10.75 645.40 19,426.42
4/9/2019 0.51 31.75 329.15 10.37 655.76 20,820.47
35.86 5525.11 155.76

The bottom line shows the average close price, the amount of dividends collected and the number of share purchased.

One warning. Even with these types of investments, I would not ride out a bear market, unless I had 20 years ahead of me before retirement. Learn and watch the indicators, and get into cash or money markets. When you get back in a lower prices later, you'll be glad you sold. You'll be buying even more shares. This is called stockpiling, no pun intended. 

Also, the way your broker keeps track of these investments is different from the way I'm doing it. Your broker will use each purchase with its own basis for reporting, and the costs will look different than presented here. This is necessary for income tax purposes, should you sell your holdings. Of course, if you build your investments  inside of a Roth IRA, when it comes time to withdraw your earnings, they'll be tax free.

Comments

Popular posts from this blog

What happened when a Trump Supporter Challenged Me About the Wall

Vicky Alvear Schecter wrote in Medium | Poltics on Dec. 27, 2018 using her headline above. I thought it was pretty well written -- at least she made an attempt to keep her liberal bias out of it -- regardless of a few illogical fallacies

But she does make an attempt, in an effort to avoid her liberal bias, as she ponders  "...in order not to be accused by bias, I explained that I would only use conservative sources to prove my point."

To me, that's bias to start out with that premise. And I believe her premise is that she is against the wall. That's her stance. But she makes some good points, but some are skewed, even though she attempt to take a "conservative" approach, even by citing some "conservative" sources in her footnotes.

Here's the first problem: if she wanted to avoid bias, why not just stick to the the historical facts as written (when you can find them without bias), and not concern oneself with bias. "I must reject that becau…

Weekly wrap for Nov 9

After Thursday and Friday, it might seem the markets are down, but the weekly numbers tell a different story, with the three major indices up for the week. The Nasdaq, with its tech exposure, had the smallest increase. The tech sector is obviously under recent pressure. 

IndexNov 2Nov 9+/-%S&P 5002,723.062,781.01+ 57.95+ 2.12%Nasdaq7,356.997,406.90+ 49.91+ 0.67%DOW 3025,270.8325,989.30+ 718.47+ 2.84%
Over the last 12 months, the Dow is up 10.77 percent, the SP 500 up 7.6 percent, and the Nasdaq up 9.7 percent.  

The weekly chart of the SPY still indicates a long position in the broader market. (The blue line is the 34-week moving average; the red is the 13-week moving average).

















While the U.S. economy still seems to be just fine from most reports, investors seemed to worry about a couple of things on Thursday and Friday: 1) The Eurozone, 2) trade with China, and 3) the Fed and interest rates. Another topic of interest has been oil. 

First, it seems that the Fed has really not indicated …

U.S. Top Oil Producer, Thanks to Obama

\ You read that right.

The U.S. is now the largest oil producer in the world, according to the EIA, producing some 15 million BOE per day, surpassing Russia and Saudi Arabia. (Remember back when Jimmy Carter said in 1979 the answer to our energy problems was to wear a warmer sweater...but you probably don't. He actually said this on national TV).

The United States is the top oil-producing country in the world, with an average of 14.86 million b/d, which accounts for 15.3% of the world's production. This is down from 15.12 million b/d in 2015, but it was enough to land the United States in the No. 1 spot, which it has held for the past four years running. (Source: Investopedia.)

Guess who takes credit for it? Granted, this increase in production began in 2012, but only because of private industry and the fact that the price of oil was at nearly all-time highs. And it dipped in 2016 because of Obama's anti-oil policies! 

But here he is again


Former President Barack Obama sure l…