Pick a path. Down Steady Lane, you buy into a stock at $50. Like clockwork, every passing year finds the stock inching ten bucks higher. Five years and plenty of restful nights later, you find yourself at $100. Now consider the unpaved Rocky Road. You start at the same $50 a share mark. Five years later, you find the stock has doubled to $100 as well. However, it's cuckoo clockwork down this path less traveled. A year in the stock is slammed down to $20 a stub. It creeps back up to $50 the following year only to fall back down to $30 a year later. A strong finish has both paths winding up at the same destination, but your blood pressure isn't any better for the wear.
So, you're at that fork, which signpost do you fancy? Well, since you're reading a piece about dividend reinvestment plans -- and I'm so transparent that you can see I was trying to throw you a curve -- I can already see most of you lacing up your Timberlands and gearing up for the Rocky Road hike.
For those of you wondering why you're in the minority with your "I Love Steady Lane" T-shirts, the answer boils down to this: dollar-cost averaging. Drips, by definition, are not one lump sum deals. Every quarter, your dividend will go right back into buying more stock. Ideally, you will be adding additional cash investments as well. In a twisted yet very real way, as long as you are comfortable with the fundamentals, the downticks are a welcome sight.
Consider our first Drip purchase, Intel (Nasdaq: INTC). Back in 1997, everyone was loving chip stocks. Then again, they were also high on Beanie Babies and Tamagotchi. We paid $94.69 for our first share, along with a $15 fee. Because the stock has had a pair of 2-for-1 splits since we first bought in, on a split-adjusted basis we can pretty much get the same bang for our buck today.
Is the Pentium 4 titan the same company it used to be? The balance sheet doesn't think so. The company's net cash position is a billion dollars richer. The income statement hasn't been as kind on the surface. Last year marked the first time in which annual personal computer sales dipped and Intel felt the pinch. Since we first bought in, the company also found a pesky competitor in Advanced Micro Devices (NYSE: AMD) after it rolled out its Athlon chip, setting off speed and price wars in the microprocessor sector. But does this mean Intel is less of a company today?
Hardly. Revenue still clocked in higher this past year than it did in 1997 and, while the company was bruised last year, operating profits for 2000 beat out the 1997 results by a decent-sized margin. Earlier this week, the company rolled out its latest speed freak -- a Pentium 4 chip running at 2.53 gigahertz. Unfortunately, the stock's been on a roller-coaster ride over the past four-and-a-half years. Literally. It went up the lift-hill. It came barreling back down. With that kind of chart action and our regular contributions, it's a statistical wonder that we are actually in the black with Intel.
Things could have worked out so much better if Intel's mountainous chart action would have been its river reflection. If the stock had tanked for a couple of years, only to return back to its 1997 level, we would have owned more than the nearly 60 shares we currently have at a lower cost basis. Rocky Road rocks.
Granted, this only matters if the catalysts are in place for the stock to bounce back. Earlier this year, we cashed out of a Drip for the first time. We took a loss on Campbell Soup (NYSE: CPB), despite the luxury of being able to average down. The reason we canned it? The fundamentals were M'm! M'm! Bad. There was little reason to believe that things would get better anytime soon for the troubled food company.
See, I'm happy when it rains, but only when I know the storm clouds will pass. This isn't always an easy thing to spot. I mean, face it: If you buy a stock and it goes down, it means one of two things -- either you bought too soon or you bought the wrong stock. It's OK. There are folks who nail entry and exit points every time out. They are called deluded revisionists. Or liars. Or both.
You, on the other hand, play in a non-fictional rational world. There is only so much market timing that can take place with the calculated Drip process, anyway. However, if you can single out an attractive company trading at an attractive price, what do you do when you see the price halved a few months later?
Obviously something happened. Did the company have a bad quarter? Did someone pull on the thread of its business plan until it came undone? How likely is the company to bounce back? If so, when?
If you can swallow the reality of the situation and still feel that the reasons you bought in remain intact, congratulations. You have just been presented with a 2-for-1 sale on your next dividend reinvestment or, better yet, your additional cash investment.
To illustrate the point, let's go back to that fork in the road. Sidestepping the dividends for the sake of simplicity, if you were to add $100 to your position every passing year, this is how the road would unravel:
Steady Lane Year 1 -- 2 shares at $50 Year 2 -- 1.7 shares at $60 Year 3 -- 1.4 shares at $70 Year 4 -- 1.3 shares at $80 Year 5 -- 1.1 shares at $90 Total on Year 6 -- 7.5 shares at $100 or $750 Rocky Road Year 1 -- 2 shares at $50 Year 2 -- 5 shares at $20 Year 3 -- 2 shares at $50 Year 4 -- 3.3 shares at $30 Year 5 -- 1.7 shares at $60 Total on Year 6 -- 14 shares at $100 or $1,400
So, as long as you know where you're going, there's no need to fear Rocky Road's unpredictable footing. Choose the road less traveled. It will make all the difference.
Rick Aristotle Munarriz remembers Weird Al's "I Love Rocky Road" parody of Joan Jett's chart-topping ode to Rock & Roll. Do you? He does not own any shares in the Drip Port, though rumor has it he spilled some Pepsi One on his keyboard during the writing of this piece. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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