The Power of Direct Investing

Whose advice can you trust? Some seemingly smart people warn of a collapse of the dollar… and the markets with it. Others are saying to ride the cycles… And there are still others who advise people to fully commit now, as we are on the cusp of a historic bull market. It’s hard to be rational in such an irrational environment. Yet, doing nothing is rarely a worthwhile option.

Investing in America’s finest companies and sticking with them over the long term has proved to be the most reliable way to generate inflation-beating returns. That’s what you must achieve for a financially secure retirement. Your objective, then, is to find a way to avoid the vagaries of the market and invest according to a strategy with which you can feel comfortable.

In my last article, I described a simple investing approach that will protect you from the angst that generally accompanies stock market investing. With this approach, there are no worries about possibly buying into the market (or into a specific stock) at what later turns out to be the worst possible time. The approach I’m talking about is taken by the world’s most successful investors: Identify a widely diversified portfolio of high-quality companies and continually build up holdings in these companies. Investing through direct investment plans (DRIPs) is the ideal way to follow that approach.

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When you invest directly through company-sponsored DRIPs, you can start out with just a single share of stock and regularly invest even tiny amounts to build wealth steadily over the long term, without paying special attention to any swings in the market. Indeed, investing in this manner makes market volatility work for you. How so? By accumulating shares in the systematic manner I described, the average cost of your shares will turn out to be even less than the average market price that those shares were selling for during the period you invested.

How can an investor put such a strategy in place?

First, construct a portfolio from among the great companies that offer direct investment plans (DRIPs) and get enrolled in those plans. There’s plenty of help to identify such companies at our web site, directinvesting.com (opens in new tab).

Then decide how much you can afford to invest in each company. Keep in mind that DRIPs are probably the only way to make petty cash work for you in the stock market. That’s because investments of as little as $25 or $50 are acceptable to most DRIPs. Where else can you put $25 to work in the stock market?

By regularly putting even such small amounts into shares (or even fractions of shares!) over the long term, the dividends thrown off by those shares will compound and provide substantial wealth.

Twice each month, David Fish, Moneypaper’s executive editor, features a DRIP stock he believes to be of particular interest to investors. The current selection is NextEra Energy.

NextEra Energy (NEE) (opens in new tab) is the parent of Florida Power & Light, a utility that engages in the generation, transmission, and distribution of electricity to 4.7 million customers in a 27,650-square-mile area of eastern and southern Florida. Its NextEra Energy Resources subsidiary is a non-regulated power generator that produces electricity from nuclear, natural gas, solar, and wind generation.

It is the U.S. leader in production of energy from wind, with a capacity to produce 8,500 megawatts from those sources and 44,900 megawatts of electricity in total. The consensus estimate is the company will earn about $5.66 per share this year and $6.15 in 2016, compared with $5.30 in 2014. The dividend has been increased for 21 consecutive years, and the annual payout of $3.08 per share results in a yield of 3.2%.

NEE is just one of nearly 1,300 companies that allow you to invest directly in their company-sponsored DRIP. Many of these companies don’t charge fees for optional cash investments or reinvesting dividends. You can see a listing of every no-fee DRIP here (opens in new tab).

Don’t wait on the sidelines, falling victim to inertia driven by fear of doing the wrong thing. The right moment to enter the market is now, regardless of the short-term direction it may take, and DRIPs offer an low-risk, cost effective way to buy stock right now.

Ms. Vita Nelson is one of the earliest proponents of dividend reinvestment plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing at www.drp.com (opens in new tab) and www.directinvesting.com (opens in new tab). She is the Editor and Publisher of Moneypaper's Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).