<THE DRIP PORTFOLIO>
Ways to Invest in DRIPs
[Note: This article was originally published on Jan. 19, 1999]
by George Runkle (TMF Runkle)
Let's say you have done all the necessary work, and opened your first DRIP account. What is the best way to invest in it?
I've seen three different ways to accomplish this. The first way is to send in any money that you may have available for investing at the end of the month. I call this the "Amount Available" method. The second is to schedule a fixed amount to that stock every month, either through an automatic withdrawal, or just as a schedule on your own. This one is what I call the "Fixed Automatic Investment" method. The third way is to apportion to each DRIP account a percentage of the amount you invest each month based on analysis of each DRIP stock you own. Let's call it the "Percentage Allocation" method.
The Amount Available method has a number of pitfalls. If you are anything like me, you may never have enough available at the end of each month. Too many things take priority and money for investing never seems to be around. The problem also is you could be investing at random. You may be throwing money in your stock when it is selling at an unrealistically high cost.
The Fixed Automatic Investment works very well. It builds the investment into your budget, and allows you the advantage of dollar-cost averaging. As a stock drops in price, you buy more shares, as it goes up, you buy less. The other advantage is that it requires no thought. If you use an automatic investment feature for it, it is even more brainless.
Now, wouldn't it be better to invest more of your funds into a stock that is down that month? Certainly it is, which brings us to the Percentage Allocation method. Some DRIP investors track their stocks month by month, and invest more in stocks by various criteria. Usually its some comparison of PEs of the stocks in the portfolio with each other, and their historical PEs. I knew a guy that did this by hand every month, and did very well. He kept 3x5 cards on each stock and did these sorts of calculations every month. Did I mention he was retired?
What method do I use? Well, I use all three. There are stocks that I have arranged for automatic payments every month. With Coca-Cola, I am constantly tracking its PE, and when it drops close to its historical trend, I send in more money. Also, at random I send a few dollars to different DRIPs in my portfolio. I find it good to use with electronic bill paying, such as Quicken. I just send in some money to a DRIP while I pay the bills.
My favorite method is the Fixed Automatic Payment, since it is easy, and guarantees an investment is made every month. I don't have to follow the stock, the investment is made for me and I don't think about it. With the Percentage Allocation method, I only feel comfortable doing this with Coca-Cola, since I have followed its PE trend for quite a while. The Amount Available method may be suited for you if you can set aside extra cash after your expenses, but for me, it is best left for only occasional use.
In conclusion, I feel it is necessary to consider your own personality and the way you handle money when you decide how you will invest in a DRIP. If you routinely spend every cent you have, it isn't very Foolish to plan on the Amount Available method of investing. If you have barely enough time to breathe because of a busy schedule, you probably won't do well with the Percentage Allocation method. If you are retired like my friend, the Fixed Automatic Investment method would take a lot of the fun out of having a DRIP. The most important thing is to make the investments, and do so on a regular basis.
Would you work for a bunch of Fools?