What is the best way to employ dividend profits? We have three options:
- Reinvest the dividend money automatically via DRIPs,
- Deploy the profits strategically via smart shopping lists, or
- Stack the dry powder for a special moment.
All three methods work. Really, there’s no wrong choice. I encourage you to consider the reinvestment plan that fits best with your personality, and simply stick with it.
Which to choose? Let’s consider the highlights of each.
Dividend Redeploy #1: Automatically via DRIPs
Dividend reinvestment plans (DRIPs) are always a popular topic here at Contrarian Outlook. These plans provide us with a simple “set it and forget it” way to plow the payouts that we don’t need back into our favorite dividend-paying stocks.
The idea here is that our extra income can be reinvested and create more income for us down the road. The allure of a DRIP is that it requires no oversight beyond our initial election “to DRIP.”
Traditional DRIPs simply take your dividends and plow them back into the stock or fund that issued the dividend. If your brokerage offers this option, it is a great way to grow your future payout stream without thinking twice about it.
Dividend Redeploy #2: Strategically via Smart Shopping Lists
These are the stocks and funds in the current portfolio that I’m projecting to reward us with the highest total returns in the months ahead (dividends plus price appreciation).
This short list (from the June 2020 edition of CIR) worked out quite well. The yield on Synovus Financial (NYSE:SNV), for example, is now less than 3%. Don’t worry, the dividend payment stayed the same and readers who reinvested money in SNV at that time are still enjoying a 6.7% yield on their cost.
It was the stock price that soared:
ONEOK's (NYSE:OKE) yield has likewise retreated from 9.8% to “just” 7.3% today. But like SNV, the dividend wasn’t reduced—the stock simply gained.
The monthly shopping list assumes your account is not automatically reinvesting dividends or that you are not adding new money. It requires a bit more work to maintain than a DRIP because you are choosing the best places for reinvestment at the time—not just the stock that paid the dividend.
For many investors, this extra step is worth it. We are able to cherry pick the very best dividend deals on the board and acquire more shares when prices are low (and yields are high) of those specials.
Then, as prices begin to rise, we can kick back and enjoy the run.
Dividend Redeploy #3: Stack the Dry Powder for a Special Moment
If you find yourself obsessed with timing the market, here’s the bad news. The market’s next move (up or down) is usually a coin flip.
Now, the good news. It is a weighted coin! Bear markets typically last months while bulls run for years. Long-term, the direction of the market is up.
Plus, the best buying opportunities usually appear after a “bear refresh.” Of course, April 2020 comes to mind, but let’s not forget that October 2020 was also a pullback that provided us with an amazing “double discount” opportunity.
In our October issue of CIR, we recognized that:
- The broader market had pulled back about 10% from its recent highs.
- However, there were stock-focused closed-end funds (CEFs) trading at 15% discounts to their net asset values (NAVs)
- These NAVs were made up of high-quality dividend stocks.
- So, buying these CEFs in October was the equivalent of buying the S&P 500 index for less than 3000, when it was 3298 at the time:
Applying CEF Discount “Coupons” to An Already Discounted Market
Fast-forward seven months, and we have the S&P 500 above 4000. It’s up by nearly one-third. And the two CEFs we added in October’s CIR? They’re up by nearly one-third (including dividends) as well.
The shopping spree approach to dividend redeployment can deliver outsized profits in a short period of time. We are concentrating our buying power on the best dividend payers in the moments when they are the cheapest.
These moments, however, don’t last long and many investors lose patience waiting for them. But if you can bide your time, these income bargains can be worth the wait.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."