Scottrade’s new Flexible Dividend Reinvestment Program (FRIP) goes a long way to overcome the disadvantages of the traditional DRIP outlined in my previous article: How DRIPs Can Cost You Money (http://voices.yahoo.com/how-drips-cost-money-12209106.html). Here I discuss a strategy to maximize the profitability this new FRIP plan allows.
As discussed in the previous article, traditional DRIPs reinvest the dividend into the same stock that it originated from. This is a disadvantage as the price typically rises as the declaration and record dates approach, causing an erosion in purchasing power of the dividend. Scottrade’s new program provides you an opportunity to overcome this disadvantage.
The FRIP allows investors to purchase shares of one or more companies with that dividend. By indicating the percentage of the dividend to be allocated on a monthly or quarterly basis, you can accumulate shares in other companies to diversify your portfolio and decrease risk.
Since stock prices inflate as the date of record nears, you can employ a methodology of picking dividend stocks that have dissimilar dates of record. Using dividends to buy stock that has moved past the date of record and whose price has normalized will maximize your buying power. You can pump the value between two dividend stocks, or use a rolling reinvestment approach to increase your holdings in multiple companies.
Investors can also choose to reinvest in other qualified stocks without a dividend or to establish a position in companies you might otherwise avoid. Smaller investors often avoid high dollar per share stocks like IBM, Apple, and Google as one share can cost hundreds of dollars. Dividend reinvestment plans allow for partial share ownership, so using an affordable dividend stock to build share ownership in high value shares may also interest investors.
Though this program can provide a safer auto-pilot, don’t forget that individual stocks must be watched. Many factors can affect a stock’s price, value, and dividend. Dividends can be reduced or ended at anytime, leaving an unattended portfolio to fall flat.
Brokerage accounts and finance websites can provide research to find potential dividend stocks. Most major financial sites also provide or produce yearly lists of the stocks paying the highest dividends. These are a great place to start your research so you can prepare a plan for a better portfolio, and turn them in to a steady stream of income and value.