Create Your Own Customized

Dividend Reinvestment Program

by

Brad Castro

I've written elsewhere about Dividend Reinvestment Plans and the power of reinvesting dividends.

In short, reinvesting dividends is simply using the proceeds of your dividend income - either through a company-sponsored DRIP or a dividend reinvestment program with your online broker - to automatically purchase additional dividend paying shares.

When combined with dividend growth, the result is an ever increasing stream of dividend income.

Conventional Dividend Reinvesting

There are definite benefits to these programs, as I detailed in the related pages linked above.

But there are also a couple of drawbacks as well:

• The tax accounting and cost basis tracking in taxable accounts can be a major headache. Purchasing shares and partial shares every three months, potentially for decades, is a lot of minutiae to keep up with.
• The bigger drawback, however, is the danger of over concentration in dividend paying companies that turn out to be less than the highest quality. Imagine reinvesting dividends in a company like GM for a few decades only to watch everything come crashing down, destroying both your net worth as well as your previously impressive cash flow. Remember - not all dividends are created equal.

A Personal Dividend Reinvestment Program

Instead of reinvesting dividends from one company into more shares of the same company, they'll allow the dividends from all their dividend paying stocks to accumulate until they have sufficient funds to justify the purchase of additional shares of whichever stock (or other investment) that they find most compelling at the time.

A Customized Dividend Reinvestment Program

And the number one thing to keep in mind is that, unless you already have a large income-producing portfolio, the more sources of cash you can generate beyond your regular dividends, the more effective your reinvestment program will be.

I know - that's an incredibly obvious observation. But it bears repeating. The challenge then is to find multiple effective ways to get continuous infusions of cash into your investing account.

Warren Buffett does this masterfully with Berkshire Hathaway's investments. Look at all the sources of new investing income the company is constantly producing:

• The float generated by high cash flow insurance operations (e.g. GEICO)
• Dividend income from large positions in dividend paying companies (e.g. Coca-Cola, Johnson & Johnson, General Electric, etc.)
• Premium income from select put writing strategies
• Interest revenue from cash and cash equivalent investments

How many income streams can you count on for your own new investments? For most retail investors, any additional sources of cash infusions will be limited modest dividend income and savings from either a salary or from the profits of a personal business.

The Leveraged Investing Stream

And, depending on which strategies you use and how you specifically use them, the option premium income (which is designed to lower the cost basis on your long term investments, although you may also view it as a source of perpetual refunds or rebates) usually ends up being a lot more than your dividend income.

Options can be deadly when used aggressively, but when used creatively, intelligently, and carefully, and in conjunction with your long term quality investments, they offer you the potential for dramatically improving your life.