Wednesday, December 10, 1997
The Daily Dow
by Robert Sheard
LEXINGTON, KY. (Dec. 10, 1997) -- One of the keys to the success of the Dow Dividend Approaches is... ready for this?... the dividends! That's nothing profound, of course. But the goal of trying to stay as fully invested as possible brings up the often-asked question of what to do with those quarterly dividend payments while you're waiting for your next portfolio update.
And there are many options. First, let me explain that our model returns assume that the dividends sit idle throughout the year, not gaining a penny in interest nor being reinvested in more shares of the stocks that paid them in the first place. So virtually any plan you choose to redeploy these dividends is likely to do better than our model assumption.
The easiest plan is simply to let them gather in your brokerage account cash component. Depending on your broker's rules, you may earn money-market interest rates while the cash sits. Easy, but not all that effective.
A more complicated plan is to set up Dividend Reinvestment Plans with the Dow stocks you hold and have the quarterly payments reinvested automatically. The advantage to this is that your money from the dividends goes back to work much more quickly. The downside, however, is much more paperwork to deal with if you plan to sell these stocks just a few months after you start receiving your dividends.
Another plan is one also used by investors who add new money regularly to their portfolios. You may wish to stagger several groups of Dow stocks throughout the year. Every few months, you have a group of stocks coming up for renewal. At that time you can add any new cash and any accrued dividends as you update the group of stocks. Your dividends (and new money) don't sit idle for long, you avoid the paperwork hassles of starting and stopping DRiPs every year, but your trading costs do rise because you're essentially running several Dow portfolios. Depending on the amount of money you're investing and the price you pay per trade, this still may be worthwhile.
And for those advanced investors out there who carry margin balances, your dividends will simply go toward paying down your margin balance.
So you have a number of options for dealing with dividends. Look at the details of each of these options (and perhaps others) and then choose the one that fits your need for simplicity and desire for increased earnings the best. Fool on!
Stock Change Last -------------------- T - 1/8 57.94 GM + 7/8 64.19 CHV - 3/8 78.25 MMM - 11/16 93.88
Day Month Year FOOL-4 -0.07% 1.34% 27.78% DJIA -0.88% 1.99% 23.74% S&P 500 -0.61% 1.51% 30.92% NASDAQ -1.48% -0.25% 23.67% Rec'd # Security In At Now Change 1/2/97 479 AT&T 41.75 57.94 38.77% 1/2/97 153 Chevron 65.00 78.25 20.38% 1/2/97 179 Gen. Motor 55.75 64.19 15.13% 1/2/97 120 3M 83.00 93.88 13.10% Rec'd # Security In At Value Change 1/2/97 479 AT&T 19998.25 27752.06 $7753.81 1/2/97 153 Chevron 9945.00 11972.25 $2027.25 1/2/97 179 Gen. Motor 9979.25 11489.56 $1510.31 1/2/97 120 3M 9960.00 11265.00 $1305.00 CASH $1409.35 TOTAL $63888.23