While looking at my last post about the Sun Life trade it occurred to me to look at it as a Dividend Re-Investment Plan (DRIP) opportunity rather than an active trading stock and I came up with three simple variations. Without looking at the actual plan setup, counting any income taxation or counting to the 6th decimal place I ran a quick spreadsheet to give me some idea of possible outcomes should I have started the DRIP in November 2008.
Common items:
I counted the opening price on the day before the ex-dividend date each quarter as the share purchase price. Equal $2,000 purchases and the same price for the reinvested dividends as today, 36 cents per share. There is also a 5% discount on shares purchased with dividends, I did not count that. There are no commissions as a DRIP has none.
While not completely accurate it works to get a feel for the plan without getting overly complicated.
Variation One: The short term investment
There were 13 quarterly payments for a total of $26,000 invested.
The total value of the plan this month would be $22,658 for a paper loss of $3,342 or 12.9%. Far better than the over 30% loss from the advisor's suggestion, but still a loss.
So much for that idea, although other stocks may have faired better under the same timeframe I was not looking for ideal candidates.
Variation Two: The mid term investment, 5 years with stable pricing
I ran the numbers until May 2015 (about 5 years) with the same payments and dividends
The average price over the term was a hair over $24 but varied quarter by quarter
The total value of the plan after five years would be $82,775 for a gain of $28,775 or 53%, 10.6% annualized
Not bad for a "retirement plan".
The return is not the goal here though, dividend growth is. At the end of the five years the quarterly dividend payment would be about $1,050.
Variation Three: The mid term investment, 5 years with dropping pricing
The average price over the term was a hair under $20 also varied quarter by quarter
The total value of the plan after five years would be $57,840 for a gain of $3,840 or 7.1%, 1.42% annualized
Not great for any plan but better than a lot over the last number of years.
Again, the return is not the goal. At the end of the five years the quarterly dividend payment would be about $1,388. Due to lower pricing there are more shares purchased by the end of the period which bumps the total dividend payment. Ideally the goal is to be able to buy the shares cheap and have them increase in value after the majority of the purchasing is completed making the plan value increase while the dividends are being drawn off for income.
One other thing to note is that typically a good dividend creating stock will increase their dividend which will also boost later income. Of all of the trading that I did over the last few years the DRIPs that I started out with are all that I actively hold right now.
This is in no way a comprehensive post about DRIPs but if anyone wants more info I can post more and supply some interesting links for forums or dividend listings.
Jeff.
