Investing for the Risk-Averse
A dividend-reinvestment plan offers an affordable way to buy low-risk shares that will pay you even if their prices fall.
You know that you should be greedy when others are fearful, as Warren Buffett likes to say. And your brain is telling you that now is the time to buy because stock prices are low. But you're frozen, agape at the market's craziness every trading day.
It may be the perfect time to set up a DRIP, or dividend-reinvestment plan. In uneasy times, a DRIP offers you a way to nibble at lower-risk shares that's affordable, fee-friendly and enforces the kind of investing habits we at Kiplinger's like to encourage.
DRIPs are great for risk-averse investors because they focus on dividend-paying stocks, which provide cash cushions even if share prices continue to tumble. Dividends won't protect you from stock-market carnage (just ask anyone with a stake in financial stocks), but you'll be paid while you wait for better days.
Reinvesting those dividend payouts in additional shares forces you to dollar cost average, which means simply that you invest money at regular intervals. The beauty of this strategy is that it takes the emotion out of investing and, by definition, guarantees you'll buy more shares at lower prices and fewer when prices are high.
The best DRIPs cut investing fees to the bone. Some let you buy shares directly from the company with no broker fees, then charge you little or nothing to reinvest your dividends or buy additional shares-sometimes even at a discount to the market price.
And DRIPs don't require a huge commitment to the market -- often just a couple of hundred dollars (and sometimes less) to start. "Incrementally investing small amounts of money is a palatable way to invest in volatile markets," says Chuck Carlson, editor of the DRIP Investor newsletter. "Logically, people know that even if this isn't the bottom, stocks are a lot cheaper. But they say, 'Heck, I'm not putting all my money in now-I don't know what's going on.'"
DRIPs are definitely not for cut-and-run investors because closing your accounts and liquidating your holdings could take days or even weeks.
Hundreds of firms, including Best Buy (symbol BBY), Colgate-Palmolive (CL), McDonald's (MCD) and Microsoft (MSFT), will let you buy your initial DRIP investment directly from the company. Otherwise, to participate in a DRIP you'll have to buy at least one share through a broker (the stock must be registered in your name) or through a service such as DirectInvesting.com's Temper Enrollment Service, which will set up a DRIP for you for $50 ($25 for subscribers of the Moneypaper newsletter).
Because of the market upheaval, DirectInvesting.com has opened up its entire database -- parts of which are usually reserved for members -- to the public. "The next couple of years are a time to regroup. We've made our search criteria available to everyone. We did the same thing in 1987," says Vita Nelson, editor of the Moneypaper, whose parent firm runs the Web site.
You want DRIPs that hold down enrollment fees, administrative costs and commissions. Not all do. Some companies will charge $15 to set up a DRIP; plenty will charge $5, plus 10 cents to 15 cents a share for additional share purchases. And some even charge for reinvesting dividends-5% of the amount reinvested, say, plus a few cents a share.
Carlson recommends a handful of fee-friendly DRIPs for shares he thinks are worth buying now.
ExxonMobil (XOM) is among the safer plays in the energy group, historically a stalwart performer during dicey markets. The stock didn't lead the energy pack on the upside, and it has held up a lot better than most on the way down. Exxon pays an annual dividend of $1.60 a share. At its October 30 close of $75.05, the stock yields 2.1%. There are no enrollment or purchase fees.
Lockheed Martin (LMT) has been beaten up, but Carlson says that defense companies will continue to receive funding-no matter who wins the White House. "I don't think there's a candidate alive who wants to cut defense spending, then deal with a major terrorist attack," he reasons. Based on Lockheed's $2.28-a-year payout, the stock, at $82.18, yields 2.8%. Its DRIP charges no enrollment or purchase fees.
Becton Dickenson (BDX) makes medical supplies and diagnostic equipment. Health care is a traditionally defensive sector, and Becton Dickenson has a record of steady growth even during economic slowdowns. The company beat earnings estimates for the past three quarters reported. Third-quarter earnings are due out November 5. DRIP fees are a reasonable 3 cents a share for purchases and dividend reinvestment, and the company pays an annual dividend of $1.14 a year. With the stock at $68.24, the yield is 1.7%.
Abbott Labs (ABT), a health-care stock Kiplinger's recommended earlier this year, is also compelling. With the stock at $54.56, the $1.44-a-year dividend translates to a yield of 2.6%. Abbott charges no fees or commissions to invest in its DRIP.