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.
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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.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!