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If there were no such thing as dividend reinvestment programs (DRIPs), I probably would never have been able to afford my first house.
A little more than seven years ago, in the summer of 2006, my grandfather invested a few thousand dollars in Procter & Gamble (NYSE: PG) stock under my name. He had enrolled me in the multinational consumer goods giant’s dividend reinvestment program – a program I knew almost nothing about at the time.
He mailed me the first statement with a hand-written note that read, simply, “Procter & Gamble has raised its dividend every year for 50 years. I’m guessing it will raise it for another 50.”
He was right.
At the time, P&G paid a quarterly dividend of $0.31 per share. The company has increased that dividend by at least four cents per year every year since, and the payout has basically doubled to $0.60 a share. That’s good for a 2.8% yield.
Meanwhile, the stock has brought home a nice return. When I first “inherited” Procter & Gamble stock, it was trading for roughly $55 per share. Today it opened at an all-time record $84.84.
Between the healthy return and the DRIP, Procter & Gamble was a big winner for me. For seven years, I watched as the company’s ever-increasing dividend was reinvested into my original share count. My grandfather had started me out with a fairly modest 100 shares. With a dividend of 31 cents per share at the time, that meant an extra $124 for doing nothing that first year.
As P&G’s dividend increased, so did my annual return. Every four-cent increase in the dividend added $16 to my return. At 60 cents per share this year, that meant an extra $240-plus in dividends alone. Over seven years, I earned more than $1,300 in DRIPs.
Throw in the 50% return due to share price appreciation, and that gave me a total return of more than $4,200 on a stock that had a principal of $5,000. That 84% return is exactly double the 42% return in the S&P 500 over the last seven years.
A few months ago, my wife and I bought a house. We probably wouldn’t have been able to afford the down payment if not for the $9,267 in Procter & Gamble stock I had just sold. Given Procter & Gamble’s half-century-plus history of annually upping its dividend, selling the stock after a mere seven years probably wasn’t the wisest long-term investment. But we’re a lot happier with our first home than we would have been without that P&G money.
If nothing else, I am now acutely aware of the power of DRIPs. It’s rare to find a stock that doubles the market return. Without the DRIP, my Procter & Gamble return would have been only slightly better than the S&P return over the last seven years. Having the dividend reinvested every quarter added another 34% in total return.
I was lucky. Not everyone is fortunate enough to receive such a generous gift. What happened in the seven years since I received that gift, however, has convinced me to invest my own money in DRIPs.
Only a handful of dividend-paying companies offer dividend reinvestment programs – blue-chip companies such as Procter & Gamble, Johnson & Johnson (NYSE: JNJ) and Coke (NYSE: KO). If you’re an income investor, it’s worth enrolling in one.
Who knows? It could help pay for your next home.
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