Dividend Reinvestment Plan

I have heard about dividend reinvestment plans (or DRIPs) for a long time. By buying as little as one share of stock and reinvesting the dividends, you can end up with a whole lot of shares of stock. Sort of. Actually I almost always reinvest my dividends and distributions from mutual funds, which is where most of my money is invested, but I have never bothered doing that with stocks. I think the main reason is that I plan on selling the stocks as soon as they go up (typically 20%) rather than hold on to them for a long time. But sometimes they don’t go up very fast and I end up holding onto them for a lot longer. One of those that I have had for quite a while is Coca Cola. I think I bought them after they had years of great increases, and Coke did nothing much for the next few years. It always had a nice quarterly dividend, but for the 30 shares I owned, it was about $7 a quarter. The nice thing about Coke stock is they didn’t seem to be affected as much by big market downturns, dropping about 20% during the mortgage meltdown compared to 50% or more for most stocks. Last year the stock split and I was well over my 20% gain. Meanwhile the dividend had gone up and that same batch of shares is now giving me $17 per quarter, a 2.6% yield, more than I get with bonds.

Lately I sold my last shares of SunTrust after riding out a lot of ups and downs. I also sold Goldman Sachs after it reached a greedy target of 40%. And my Microsoft stock that I bought back in 2000 still hadn’t gone up 20%, but I sold it anyway (the problem with selling at 20% is you sell all your fast-rising stocks and end up stuck with all the laggards). Coke was the last stock I was holding with Scottrade now that I am buying shares through Vanguard for the same $7 fee. With Vanguard I can move money around online, whereas with Scottrade I had to call them and ask a person to mail me a check. That’s right, telephones, people, mail, and checks! So I felt like I should close the Scottrade account. I could transfer the Coke shares by filling out some paperwork, or I realized I could just sell them and then buy them back at Vanguard, which would be a lot easier, except it would cost me $14 in brokerage fees and realize a long term capital gain (which I would have to pay at some point anyway).

I put my plan into action yesterday by setting a target sell price of $43 a share, but the stock never reached that price. I changed it to $42.50 today and it sold a few minutes after the market opened. I figured that if I bought the shares back at $42.26, it would pay for my commissions, so I set a buy order at that price at Vanguard, but the stock kept going up to $42.80. But then it started going down, down, down, and eventually hit $42.03, so the buy order triggered. Now I’m back where I started!

But here’s a neat thing: Vanguard has a dividend reinvestment plan where they will take a stock’s cash dividends and buy shares for you with no transaction fee, just like with their mutual funds. The web page about it said you had to set up this feature in your account, so I called Vanguard and they said that didn’t make any sense and that my account already was set up for that and it was just something I could activate on a stock-by-stock basis (sometimes good to talk to a person). Since 2002, I have gotten over $400 in dividends, which would have bought me another 10 shares at least. The only thing I’m not sure about and which I should have asked when I was talking to a real person is whether they are buying fractional shares, because even the $17 dividend I am getting won’t buy 1 share of stock.