When first embarking on the path of dividend investing, after an initial bout of enthusiasm, it can get discouraging. After all, as mentioned in the post on the Downsides of Dividend Investing, dividend investing is slow and it takes a long time.
While the slowness and long time-ness are true, what can bring on discouragement are the very small steps that occur at the beginning. If the first dividend you get is 49 cents, and you measure that against how long it would take to get any substantive results, let me admit at the outset that it is possible to feel discouraged.
But, fear not, there are ways to look at the situation that will allow you to not throw your hands up in disgust and abandon your quest for financial freedom. And it should be said at this point that starting small is the best way to start for the new investor.
An Example
Here’s an example. Suppose your first investment is in a dividend investing stalwart like General Mills. This is a blue-chip company. (This post is not promoting or suggesting you buy General Mills. This is just an example for the purpose of illustration. Disclosure: I am long GIS.) As of this writing, shares are at about $55.00 per share. Things fluctuate, but let’s look at the complete situation at that price.
Suppose you are a new investor and you purchase one share. General Mills’ dividend yield is 3.58%, or $1.96 per share per year, or 49 cents per quarter. If you reinvest your dividends into additional shares, at your first quarterly dividend payment date your 49 cents buys about 0.89% of a share per quarter.
Calculating
You quickly calculate that at 0.89% of a share every quarter, it will take you more than 112 quarters to accumulate one additional share. 112 quarters is more than nine years! How discouraging is that, you feel. Too slow and too long!
But your calculations are not correct. Your math is wrong and your thinking is wrong. You are in much better shape than you realize. For more than one reason.
Firstly, your math did not take into account the compounding of the dividends from the accumulating fractional shares. Yes, the first quarter you started with 1 full share, so you will receive 49 cents to purchase an additional (approx.) 0.0089 of a share. But at that moment, you no longer own 1 full share, you now own 1.0089 shares. Which means at the second quarter you will receive more than the original 49 cents: about slightly close to 52 cents. Your share count is compounding, and increasing. It’s compound interest, and it’s in your favor.
Secondly, the price of the stock is not static. The price goes up and down. If the stock goes down but the dividend remains the same, then your dividend will be buying a larger amount of a share. If the price increases, your dividend will be buying a smaller amount of a share. It all depends what the price is at the quarterly record date, which is the date the shareholders are accounted for the dividend payout.
Thirdly, the dividend is not static. Many (but not all) large companies commonly increase their dividends, sometimes as often as once a year. (In rare cases, if the company’s business declines, dividends are cut or eliminated.) Of course dividends are not guaranteed, but a company like General Mills usually increases its dividend once a year. So the compounding accelerates over time.
Fourthly, most people do not buy one share and let it sit there. Most dividend investors will add additional funds to buy additional shares over time.
How To Get More Shares
There is more than way to do this. You can buy more shares at $55.00 a pop (or whatever its price is) through a broker. You also can embark on dollar cost averaging, which means you buy additional fractional shares. This is usually easy to set up monthly, and the funds are automatically deducted from your checking or savings account. This means purchasing the same dollar amount worth of shares every month. You will get fractional shares when this happens. You can set the amount as low or as high as the broker or transfer agent will allow.
For example, the current minimum to setup a monthly purchase of General Mills shares at its transfer agent is $50.00 per month. This might be easier to manage than, say, whatever the fluctuating share price is every month. As it happens, for General Mills there is a one-time $15.00 fee to set up the account at the transfer agent, but there are no ongoing service charges or fees to invest monthly in General Mills. (There are minor fees to sell.)
If you go this route, read all the plan documents at the transfer agent. (For more details see the post on How I Invest.) If you prefer to not participate in a monthly dollar cost averaging plan but still want to buy through the transfer agent, there is a $250.00 minimum.
I should mention that not all dividend investors do dividend reinvestment. Some take the dividend in cash and after some accumulation of funds will buy more shares in the same or different companies. This is a choice.
What I Do
My tactic is and was to do dividend reinvestment using dollar cost averaging in most cases.
So how to avoid discouragement
I did several things to keep myself from discouragement. I gave myself goals.
Goal!
First, while I invested in several companies to provide diversification, and set up my accounts to do dividend reinvestment with all of them. But I only did monthly dollar cost averaging purchases in only a few companies. I did this to avoid spreading my funds too thin. Since I concentrated on only a few companies, my investment in those companies grew. My first goal was to get to one share added per year using the dividends received in that company. Once that goal was achieved, I switched my monthly dollar cost averaging funds to some other companies that I had not added to previously until I reached the stage of one share per year in dividends in them. Once share per year is one-quarter of a share per quarter.
Eventually, through raises and promotions at my job, I was able to afford to invest with additional funds. Then I was able to increase my monthly dollar cost averaging funds, and was able to increase the number of companies I was investing in.
My next goal was to reach one share per quarter from the received dividends. I was able to reach this goal in many companies. In some companies now, quarterly dividends purchase several shares per quarter.
Once this level of increases are reached, I have enough momentum to no longer feel that things are slow or take too long. And once I had some momentum in a few companies, to increase my asset base, sometimes I then switched my dollar cost averaging money to invest in other companies.
Another
As mentioned in the post How I Invest, I track my investments on a spreadsheet. A copy of a spreadsheet of this kind is available free from the Download page .
It is essential to keep accurate records. Every transaction, whether dividends reinvested or if you purchase more shares with additional funds, should be noted in all its minute detailed glory. You will be glad you did. Don’t skip this step! It’s really important!
Good luck, and have fun!
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