Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Can Use DRIP During Market Pullbacks
Transcript
- Lucas: The S&P 500 hit 7,600 yesterday, up about 1.1 percent for the week. But if you look under the hood, a lot of classic dividend payers are actually down right now. Luna: I noticed that. Coca-Cola dropped 2.3 percent over the last five days, Johnson & Johnson down 2.9, and Realty Income off over 4 percent. Lucas: Exactly. And that creates an interesting opportunity for anyone using dividend reinvestment plans, or DRIP. When share prices fall, your quarterly dividend buys more shares. It's dollar-cost averaging in action. Luna: So you're saying a pullback actually helps the long-term income investor if they keep reinvesting? Lucas: Yeah. Let's use Coca-Cola as an example. KO pays about 48 cents a share per quarter. At 78.64, that reinvests roughly 0.6 percent of a share. But if the price drops to, say, 75, that same 48 cents buys about 0.64 percent of a share. Over time, those extra fractions compound. Luna: And you're getting more shares at a lower cost basis. That's the core of DRIP. Lucas: Right. And there are two main ways to do it. Most brokers offer automatic dividend reinvestment for free. That's the simplest. But some companies also offer direct stock purchase plans, sometimes with discounts or no fees. Luna: What about taxes? Even if you reinvest, you still owe tax on the dividend in a taxable account. Lucas: That's a crucial point. In a taxable account, the IRS treats reinvested dividends as cash income. You pay tax on the full dividend amount even though you never saw the cash. So for taxable accounts, you need to plan for the tax bill. But in a retirement account like an IRA, it's tax-deferred or tax-free, so DRIP works perfectly. Luna: And in a down market, you're essentially buying more shares at a discount. That's the whole 'buy low' part. Lucas: Exactly. And if you look at Realty Income, ticker O, it's down 4.2 percent this week to 59.55. That monthly dividend payer now yields about 6.3 percent. If you're reinvesting, you're scooping up shares at a yield above 6 percent. That's a nice entry point for income. Luna: But doesn't the stock being down signal something might be wrong with the company? Lucas: It can. But Realty Income has paid 664 consecutive monthly dividends. The business model is solid. Sometimes stocks just get caught in a sector rotation. This week, utilities and REITs have lagged as the broader market rallied. It's a macro move, not a company-specific problem. Luna: So you're screening for companies with strong dividend histories and then using pullbacks to buy more. Lucas: Yeah. And you don't have to time it perfectly. DRIP automates the process. You just keep owning the stock, and the system buys more when prices are lower. Over a 10- or 20-year period, that averaging effect can significantly boost your total return. Luna: I've also heard about dividend growth stocks — companies that raise their payouts consistently. Does DRIP work especially well with those? Lucas: It does. Because not only are you buying more shares when the price dips, but each share pays a growing dividend over time. Johnson & Johnson has increased its dividend for 62 consecutive years. If you reinvested in JNJ over the last two decades, your yield on cost is probably well above 4 or 5 percent by now. Luna: Right. And the S&P 500 itself is up over 1 percent this week, so the pullback in dividend stocks might be temporary. But for a long-term investor, that's fine. Lucas: Honest thing — we can keep making episodes like this because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's what keeps the show ad-free and focused on actual strategy. Luna: Yeah, it's a small group, but it makes a real difference. We appreciate everyone who supports the show. Lucas: So back to the strategy. One thing to watch: if you're using a broker's automatic reinvestment, they typically buy shares at the market price. But some companies' direct plans let you buy at a discount. For example, some utility companies offer a 2 to 5 percent discount on reinvested dividends. That's a hidden bonus. Luna: Do most dividend investors actually use DRIP? I feel like some prefer to take the cash and invest it elsewhere. Lucas: It depends on the investor. If you're building a concentrated income portfolio, DRIP makes sense. But if you're rebalancing across sectors, you might want the cash to deploy into something else. Neither is wrong — it's about what fits your plan. Luna: So for someone just starting out, what's the simplest way to set up DRIP? Lucas: Most brokers, like Schwab, Fidelity, or Vanguard, have a checkbox in your account settings to automatically reinvest dividends. You can enable it for individual stocks or ETFs. The Vanguard High Dividend Yield ETF, ticker VYM, is up 0.3 percent this week, but if you have DRIP on, you're buying shares at 159.19. Over time, that compounds. Luna: And with the Fed funds rate at 3.62 percent, dividends are still competitive with bonds. The ten-year Treasury yields 4.45 percent, but dividend growth can outpace that. Lucas: Exactly. The ten-year is flat this week, but dividend stocks with 5 or 6 percent yields and growth are a compelling alternative. Especially when you factor in the compounding from DRIP during pullbacks. Luna: So the key takeaway: don't fear a dividend stock's price drop if the fundamentals are intact. Use DRIP to buy more shares cheaper. Lucas: That's the idea. And check with your broker or the company's transfer agent to see if they offer any discount on reinvestment. Every little bit helps. Luna: Thanks, Lucas. That's a solid playbook for the current market. Lucas: Glad to break it down. Next time we'll look at how dividend ETFs like SCHD, which is down 1.5 percent this week, can complement a DRIP strategy.