Author Topic: Compounding Dividends  (Read 7620 times)

mrpercentage

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Compounding Dividends
« on: July 11, 2015, 09:43:56 AM »
I just want to mention something I use to decided how to compound with a small amount of capital. Some of you know this but Im assuming you know nothing.

Lets look at some dividend stocks and see what it takes to compound if you don't have the luxury of fractional shares.

Dividend investing in Robinhood.
What does it take to compound?
My goal is to compound every time a dividend is paid so my money is not laying around-- not as easy as you would think if you start small.

dividend/frequency= dividend payout---- share price/dividend payout= shares required x share price= capital needed

Lets look at some
Navios Marine
Share price is $3.69 with a dividend of $0.24-- quarterly is 0.24/4= $0.06 dividend payout
Now $3.69/0.06= 61.5 Shares. Round up-- 62 shares x 3.69= $228.78 invested to compound quarterly.

Reality Income
$46.36 share price with a $2.28 dividend. Its monthly so 2.28/12 is $0.19.   Share price 46.36/0.19= 244 shares. 244 x price of 46.36= $11,384.84 to compound by buying a new share monthly

Physicians Reality
$16.08 with 0.90 dividend. quarterly 0.225 so $1157.76 needed to compound quarterly

Natural Gas Inc.
$10.00 share. 0.54 dividend. quarterly $0.135 so $750 needed to compound quarterly

So you see share price and yield greatly effect how much money is needed to compound with a new investment. Food for thought. I hear experts say the share price doesn't mean anything-- wrong. A high share price means its going to take a lot of money for a stock like JNJ at $100 with a 3% yield in order to compound. Money will be pooling a long time. Share price matters.




YoungInvestor

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Re: Compounding Dividends
« Reply #1 on: July 11, 2015, 09:49:23 AM »
I have actually considered using 5-10% margin fort hese stocks, and have dividends gradually reimburse the loan amount.

I just can't do that in a tfsa or rrsp... Right now I just pool dividends with my monthly-or-so deposits.

Aphalite

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Re: Compounding Dividends
« Reply #2 on: July 11, 2015, 09:51:42 AM »
Please don't use margin - no need to expose yourself to that kind of risk, even on the best most defensive stocks out there. Any one of the hundreds of freak events could destroy your wealth even if the underlying company is still performing better than ever. It's the same reason you never short a stock, madness can go on for a long time.

forummm

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Re: Compounding Dividends
« Reply #3 on: July 11, 2015, 01:01:53 PM »
The margin interest rate for many brokers can be much higher than the dividend rate.

johnny847

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Re: Compounding Dividends
« Reply #4 on: July 11, 2015, 03:03:14 PM »
I have actually considered using 5-10% margin fort hese stocks, and have dividends gradually reimburse the loan amount.

I just can't do that in a tfsa or rrsp... Right now I just pool dividends with my monthly-or-so deposits.
If you want an example of how leverage (though not 5-10% leverage) can go fantastically wrong, here's an example https://www.bogleheads.org/forum/viewtopic.php?t=5934

Again, you're not proposing as much leverage as this guy did. But I at least would have trouble drawing the line of just how much leverage to use. I'd rather avoid that by just not using any leverage, period.

mrpercentage

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Re: Compounding Dividends
« Reply #5 on: July 11, 2015, 08:41:11 PM »
Never thought of using leverage and dividends to pay it back. I think I will pass though for this reason: when the market goes down, if you are compounding, you cheer. You are buying more with every dividend payment. If it goes up you are buying less. This takes natural advantage of the buy low. You are buying more shares low then you are high.

With leverage it is the opposite. You would have to be in a really strong market that is stable for it to work well. With interest rates looming-- it will effect the margin rates and you might find that shares must be purchased higher then they are worth and interest rates destroying any possible return. It would have to be a really stable market to work. I avoid leverage like I avoid financing a car. I don't want to be caught underwater with few good options available.
« Last Edit: July 11, 2015, 08:48:00 PM by mrpercentage »

rmendpara

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Re: Compounding Dividends
« Reply #6 on: July 11, 2015, 09:59:07 PM »
Most online brokers will reinvest dividends for free... even in partial shares.

In your example, if you receive a dividend from Realty Income of $10/month, it will reinvest in ~0.2 shares ($10/$46) automatically and without any transaction commissions.

Once your dividends become large enough, when combined with your own new capital, you don't need to worry so much about automatic compounding and can just add together dividends and new cash to continue buying new lots.

Retire-Canada

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Re: Compounding Dividends
« Reply #7 on: July 12, 2015, 07:19:14 AM »

My goal is to compound every time a dividend is paid so my money is not laying around-- not as easy as you would think if you start small.

For the 4 stocks you show as examples the amounted need is ~$1K or less for 3 of them. That's not a ton of $$ to have invested and if you have only a few hundred $$ invested the amount of dividend sitting around cash is not significant in your portfolio.

Even the highest stock at ~$11K isn't a huge position.

I mean how many individual stocks are you going to track and manage? Given the effort and overhead it's not like it makes a lot of sense to hold many tiny positions.

In a $500K portfolio $11K is just over 2%.

YoungInvestor

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Re: Compounding Dividends
« Reply #8 on: July 12, 2015, 08:00:47 AM »
The margin interest rate for many brokers can be much higher than the dividend rate.

That's my sticking point. My broker's rate is quite steep for small balances, so I'd need a bigger portfolio to take advantage of that.

The risk would be very manageable (at least for my personal tolerance), but I don't have the necessary ressources yet to do it properly.

mrpercentage

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Re: Compounding Dividends
« Reply #9 on: July 12, 2015, 08:11:01 AM »
In a $500K portfolio $11K is just over 2%.

I gave examples for starting small. If you think $11,000 is small for the average American you are disconnected from the brutal reality. Isn't that close to a third of the means annual pay?

Why have many small positions? Diversification. The small positions are also high yield low share price. All stocks listed throw 5% at you. NM is 7%. Maybe that will explain why a $100 share 3% yield looks daunting to start.

Compounding is compounding. Everyone needs to start somewhere. Its good to know when it will begin to compound and aim for that as an initial investment. If you can't build up to that in a year or two then perhaps find something else. I don't invest in Reality income for the $11,000 reason.  My retirement accounts do not allow individual stock picks and Im not willing to mess with those. Its a couple years old but look at this chart

« Last Edit: July 12, 2015, 08:35:56 AM by mrpercentage »

mrpercentage

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Re: Compounding Dividends
« Reply #10 on: July 12, 2015, 08:13:09 AM »
Most online brokers will reinvest dividends for free... even in partial shares.

Robinhood does not.. Scottrade does not.. Not for individual stocks. Funds will let you and index will let you.

a1smith

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Re: Compounding Dividends
« Reply #11 on: July 12, 2015, 09:44:16 AM »
Most online brokers will reinvest dividends for free... even in partial shares.

Robinhood does not.. Scottrade does not.. Not for individual stocks. Funds will let you and index will let you.

Vanguard will purchase fractional shares with reinvested dividends in ETF's (at least their ETF's).  No commission on purchase or reinvestment.  I recommend you do it in a tax-advantaged account to avoid lots of bookkeeping for cost basis.  Maybe Vanguard will track cost-basis for you; I don't have an after tax account with them so I don't know for sure.

TD Ameritrade tracks cost basis for you, they have a list of commission free ETF's, but I don't know if they will reinvest with fractional ETF shares.

seattlecyclone

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Re: Compounding Dividends
« Reply #12 on: July 12, 2015, 09:53:54 AM »
Not that I endorse dividend-focused individual stock investing, but why force yourself to reinvest all the dividends back into the same stock they came from? If Company A and Company B both pay dividends quarterly, take the dividends from both companies and buy a Company A share one quarter and a Company B share next quarter. No big deal. Also if you have non-zero trading commissions you can certainly benefit from buying a few shares of one stock instead of 1 share of several stocks.

johnny847

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Re: Compounding Dividends
« Reply #13 on: July 12, 2015, 10:03:53 AM »
Most online brokers will reinvest dividends for free... even in partial shares.

Robinhood does not.. Scottrade does not.. Not for individual stocks. Funds will let you and index will let you.

Vanguard will purchase fractional shares with reinvested dividends in ETF's (at least their ETF's).  No commission on purchase or reinvestment.  I recommend you do it in a tax-advantaged account to avoid lots of bookkeeping for cost basis.  Maybe Vanguard will track cost-basis for you; I don't have an after tax account with them so I don't know for sure.

TD Ameritrade tracks cost basis for you
, they have a list of commission free ETF's, but I don't know if they will reinvest with fractional ETF shares.

The IRS changed the rules so all brokerages have to keep track of cost basis for all shares purchased after 01/01/2011 (or was it 2012...). It's not just a TD Ameritrade thing.

JetBlast

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Re: Compounding Dividends
« Reply #14 on: July 12, 2015, 10:32:33 AM »
I handle dividends differently and therefore would not be thinking about dividends in the manner the OP suggests. I let them pool and once they've reached sufficient levels to justify making a purchase I see if I have any smart ideas for that money. It may be adding to a position, or starting a new one.  I'm trying to buy the most future profits I can for my money while staying sufficiently diversified, which is why I don't automatically reinvest in the same companies the dividends came from.

My other concern with the suggested calculation is that an investor would need to guard against letting it overly influence their decision making. The rate of compounding would be just one factor to consider in projecting total return from an investment. I worry that for a small investor they may weigh this factor too heavily in their mind, in an attempt to overcome their small cash balance. That may result in selecting inferior companies with subpar prospects because of their high yield and low share price. Obviously, some would be better than others at avoiding this potential pit fall.

Minor quibble with how you determined the required investment for Realty Income. Why should they be held to a higher standard than the others, simply because they pay dividends more frequently?  I understand not wanting cash sitting in around not invested, but if other companies are allowed to reinvest on a three month schedule, it seems reasonable to me to hold Realty Income to that same standard when evaluating a potential purchase.

mrpercentage

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Re: Compounding Dividends
« Reply #15 on: July 12, 2015, 04:41:10 PM »
Even if I judged Reality Income by a quarterly rate they would still be near 3k. That's the total balance of my robinhood account. I think if you are going to do dividend based investing then your investment should be able to compound, and you should be aware of what that will take. I do not want dividends sitting in my account for over a year. As far as investments, I did not say buy those. I was using companies to illustrate.

The only one I have is a small position at NM. NM is a shorter play for me. I don't want to sit in it more than a couple of years. I think it will rebound. I also have a 1000 in Ford that is short of compounding and must be supplemented in order to make a purchase. A 1000 in reality income would take the better part of a year fora single stock purchase. People should be aware of what it will take before they purchase. Of course I use other companies dividends as well. DIS, JPM, and AAPL all pour into Ford right now.
« Last Edit: July 12, 2015, 04:42:51 PM by mrpercentage »

seattlecyclone

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Re: Compounding Dividends
« Reply #16 on: July 12, 2015, 05:57:56 PM »
What happens if the stock price goes up faster than the dividend? Will you buy a few more shares right before the ex-dividend date just so that the dividend is large enough to buy another share? If the stock splits, will you sell half of it and buy a different stock?

It seems crazy to me that you would let this number (the amount of money you need to invest to guarantee a dividend large enough to immediately buy another share) play more than an infinitesimally minor part in your decision about which stocks to buy and in what quantity.

mrpercentage

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Re: Compounding Dividends
« Reply #17 on: July 12, 2015, 06:17:55 PM »
Geeze guys. I said this was a tool I use not the only decision for picking a stock. If that was the case over 25% wouldn't be sitting in Disney. A stock with $116 price and 1% yield. Yes it is a goal of mine for higher yielders to compound every time but it's not the only metric. I like Reality income and would invest if it wouldn't take so long for me to see the benifit of its greatest strength. but right now it takes too long and I think compounding higher yielders will benifit me more then a companies who strength is compounding that I can't compound. I don't have enough torque for a wheel that size.

Also with auto reinvest options in my scottrade account it would just sit there. More flexibility with robinhood. Some investment options are based off of broker operation. Investing in total context--- capital available, broker options, compounding rates, growth rates, and smarter options if you are buying 100-200 dollars of stock a month ect. Robinhood changes the rules. I can invest just 50 a month in actual stock if I want to. Sometimes I do.

mrpercentage

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Re: Compounding Dividends
« Reply #18 on: July 12, 2015, 06:26:53 PM »
What happens if the stock price goes up faster than the dividend? Will you buy a few more shares right before the ex-dividend date
Yes, I have.
And, if Im not sure which of my positions I want to add to that month I look to the nearest ex-dividend date too.

I want a minimum of one share per dividend. Two shares or more would be ideal. It needs to compound if that's the strategy with that stock. If it doesn't then it is a dead fish
« Last Edit: July 12, 2015, 06:45:39 PM by mrpercentage »

Scandium

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Re: Compounding Dividends
« Reply #19 on: July 13, 2015, 06:59:34 AM »
Most online brokers will reinvest dividends for free... even in partial shares.

Robinhood does not.. Scottrade does not.. Not for individual stocks. Funds will let you and index will let you.

Schwab certainly does it. I didn't even know this was an issue. I actually even own O (in Roth), from when i was fiddling with individual stocks. I own 38.2238 shares to be exact, thanks to dividends.  It's such a small amount that I've just kept it, I certainly won't bring it up to $11k just to get round numbers of shares. You could add a mutual fund to your account and deposit all dividends there?
« Last Edit: July 13, 2015, 09:23:05 AM by Scandium »

JetBlast

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Re: Compounding Dividends
« Reply #20 on: July 13, 2015, 07:02:49 AM »
As far as investments, I did not say buy those. I was using companies to illustrate.

I did not mean to imply that you were suggesting purchasing those companies. They may all be fine investments. The only one I'm familiar with to the extent I'd consider investing is Realty Income, which I hold in a tax advantaged account. I have no opinion on the others.