Starting dividend reinvestment, there are some goals that can help place the plan into concrete terms.
Sometimes, the initial slowness of dividend reinvestment leaves one feeling underwhelmed. At least it did in my case. Sort of like watching paint dry (that’s a joke). So I found that adding goals to my plans and activities made the progress a little more engaging. Which reduced or eliminated the feelings of “it’s not working” or “it’s taking too long.”
One of these actions was to calculate how many shares of a particular stock I would need to buy in order to get one share additional share when dividends are reinvested in the next quarterly payout.
Here is an example.
For a stock selling at $40.00 per share, and an annual dividend of 2%, namely 80 cents per year, or 20 cents per quarter, it would take 200 shares. Namely, if I bought 200 shares, my dividend in the next quarter would be $40 which would allow my dividend reinvest to purchase one additional share.
It goes without saying that buying 200 shares at $40 each would cost $8,000. I may or may not have that kind of money available to buy them all at once, so that threshold of 200 shares may just be a goal.
As it turns out, the calculation of “how many shares would it take to buy one additional share at the next quarter’s dividend” is a function of the dividend yield, not the stock price. Any stock paying a 2% yield would need 200 shares to buy one additional share, regardless of the price.
Similarly, one stock paying a 5% yield would need 80 shares to buy one additional share at the next quarter’s dividend.
This is not to hint that a stock with a 5% yield is a better stock than a stock paying a 2% yield. Nor does it indicate quality of the company’s finances or its business prospects. So making a decision to buy or not buy a stock solely based on such criteria as the number of shares it would take… is shortsighted and inappropriate, So much more goes into assessing a company when buying shares.
But once the decision is made to actually buy stock in a company, then the question that comes next is how many shares to buy. This is of course a personal decision based on one’s risk tolerance, the state of one’s finances, and so on.
My setting a goal of at least one share per quarter is an arbitrary one. When I started, I aimed for one share per year. I did not always make that goal, and truth be told, there are some stocks I have held for many years that still have not achieved the one share per year result. (Sometimes a stock’s valuation metrics does not entice me to buy.) But is some cases I exceed the one share per quarter, where the dividends buy multiple shares per quarter. So my goals of “shares per quarter” are just arbitrary signposts for me to see my progress. I never intended it to be a hard and fast rule or requirement.
Needless to say, so many things affect what happens when dividends buy additional shares. An increase in the stock’s price lowers the amount of additional shares that can be bought. Conversely, a lowering of the stock price increases the opportunities for additional shares. A reduction of a dividend also lowers the amount of additional shares that can be bought. A dividend increase has opposite affect. So the shares per quarter is never static. And the following quarters’ dividends add to the prospects of share buying.
Do you have dividend reinvestment goals? Let me know here.
The U.S. Internal Revenue Service issued “Beer Stamps” in various designs from 1866 to 1951 to indicate tax was paid on beer manufacturing.
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