If there were no such thing as DRIP investing, I probably would never have been able to afford my first house.
A little over a decade ago, in the summer of 2006, my grandfather invested a few thousand dollars in Procter & Gamble (PG) stock under my name. He enrolled me in the multinational consumer goods giant’s dividend reinvestment plan (or DRIP, for short) – a program I knew almost nothing about at the time.
He mailed me the first statement with a hand-written note that read, simply, “Procter & Gamble has raised its dividend every year for 50 years. I’m guessing it will raise it for another 50.”
He was right.
Earning a steady stream of income from your investments is a good way to build wealth and save for retirement.
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At the time, P&G paid a quarterly dividend of $0.31 per share. For the seven years that I held the stock, the company increased that dividend by at least four cents per year every year, and the payout basically doubled to $0.60 a share.
Meanwhile, the stock brought home a nice return. When I first “inherited” Procter & Gamble stock, it was trading for roughly $55 per share. When I sold the stock in 2013 (more on this in a bit), it was trading at what was then an all-time record of $84.84
Between the healthy return and the DRIP, Procter & Gamble was a big winner for me. For seven years, I watched as the company’s ever-increasing dividend was reinvested into my original share count. My grandfather had started me out with a fairly modest 100 shares. With a dividend of 31 cents per share at the time, that meant an extra $124 for doing nothing that first year.
As P&G’s dividend increased, so did my annual return. Every four-cent increase in the dividend added $16 to my return. Over seven years of simply holding the stock, I earned more than $1,300 in DRIP money.
Throw in the 55% return due to share price appreciation, and that gave me a total return of more than $4,200 on a stock that had a principal of $5,000. That 84% return was exactly double the 42% return in the S&P 500 over the same seven-year span.
Three years ago, my wife and I bought a house, and we probably wouldn’t have been able to afford the down payment if not for the $9,267 in Procter & Gamble stock. Given Procter & Gamble’s half-century-plus history of annually upping its payout, selling the dividend stock after a mere seven years probably wasn’t the wisest long-term investment. But we’re a lot happier with our first home than we would have been without that P&G money.
If nothing else, I became acutely aware of the power of DRIP investing. It’s rare to find a stock that doubles the market return. Without the DRIP, my Procter & Gamble return would have been only slightly better than the S&P return over the seven years I held the stock. Having the dividend reinvested every quarter added another 34% in total return.
I was lucky. Not everyone is fortunate enough to receive such a generous gift. What happened in the seven years after I received that gift, however, has sold me on the power of DRIP investing —and convinced me to invest my own money into a few of these magical programs!
Only a handful of dividend-paying stocks offer dividend reinvestment plans – blue-chip companies such as Procter & Gamble, Johnson & Johnson (JNJ) and Coca-Cola (KO). If you’re an income investor, it’s worth enrolling in one.
Who knows? DRIP investing could help pay for your next home.
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