Motivation
My kids are both adults. They live in Texas and I live in Virginia. I talk to them on the phone occasionally but seldom see them.
During the first few years of being half a continent away I still thought I knew them pretty well; enough that I could pick birthday and Christmas gifts for them that they’d like.
But, as the years went by they grew older - less & less like the teenagers I remembered. Buying presents became difficult.
During this same time my interest & knowledge about investing grew. And along the way I discovered DRIP accounts.
Discovery
After experimenting with my own DRIP for about a year I thought of opening DRIP accounts in the names of my two adult children. The idea was to take money I would normally spend for their Christmas and birthday presents and use it to buy shares of stock. I could also use the DRIP accounts and occasional statements to teach them about compound interest, dollar-cost averaging, and dividends; and, to encourage them to begin investing in their own future.
Preparation
The first thing I did was to prepare Excel spreadsheets that demonstrated the power of compound interest. The spreadsheets also demonstrated the affect of various monthly investment amounts over a range of years and growth rates.
A key to making the whole thing work was getting their consent and commitment to making no attempt at withdrawing money from the accounts and allowing me to managing them.
In the end, I selected a stock, Hasbro (HAS), and added that stock to my own DRIP account. Then I filled out transfer forms for each of my kids. Next, I visited them in Texas and explained the Excel spreadsheets, DRIP accounts, and my plan to buy stock with their birthday & Christmas money.
Having secured their commitments to not mess with the accounts until after my death, they signed the transfer forms.
I mailed the transfer forms to Computershare, the Hasbro transfer agent. A few weeks later I received confirmation from Computershare that one share of HAS stock had been successfully transferred to each of the kid’s DRIP accounts.
Finally, I set up accounts in the kid’s names on the Computershare web site.
Execution
The accounts were now set up. My plan was ready to execute. I took the remainder of my birthday & Christmas budget and spread it out over the following year in $25 dollar increments; dollar-cost averaging into Hasbro stock.
Twice a year, May & December, I send the kids an activity statement showing the investments made and the current account value.
During the second year I added another stock and in the third year I added a third stock. The total annual investments remain the same. I just allocate the investments to different stocks at different times. I don’t have an automatic monthly investment set up. I manually prepare each one and use an Outlook task reminder to schedule investments and to keep me on budget.
The next time I visit them in Texas, I plan to review those Excel spreadsheets with them again - including the actual results from their DRIP accounts. I hope to encourage them to start putting a little of their own money into the DRIP or into their own Roth IRA account.
In the next post I’ll take a close look at administering a DRIP account after the initial set up.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
Thursday, November 25, 2010
Thursday, November 18, 2010
How to Get Rich Slowly DRIP by DRIP: Gifts to Children
For your own investments you have many choices besides DRIP accounts. Starting with an employer-sponsored 401k plan and including Traditional and Roth IRA accounts available from just about every financial institution of any type. Even life insurance and annuity contracts are investment options.
However, for your grandson or your niece your choices are limited. The amount of money you can afford to invest for them is also likely more limited. The limitations make DRIP accounts an attractive choice.
With a series of one-time investments of $25.00 in any month you can invest annual amounts ranging from $25.00 to $300.00. Of course, you can invest significantly more than $300.00 a year. But the more money you can commit to the child’s investment the more investment choices you have.
DRIP’s are perfect for the grandparent of modest means. With low periodic contributions completely under your control, you can make a huge difference in a child’s financial outcome.
Accounts for minor children can be set up as “custodial” accounts. For adult children they can be set up in the name of the adult child and, with the cooperation of the adult child, managed by you – the contributor.
In the next post I’ll review the DRIP accounts I set up for my adult children.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
However, for your grandson or your niece your choices are limited. The amount of money you can afford to invest for them is also likely more limited. The limitations make DRIP accounts an attractive choice.
With a series of one-time investments of $25.00 in any month you can invest annual amounts ranging from $25.00 to $300.00. Of course, you can invest significantly more than $300.00 a year. But the more money you can commit to the child’s investment the more investment choices you have.
DRIP’s are perfect for the grandparent of modest means. With low periodic contributions completely under your control, you can make a huge difference in a child’s financial outcome.
Accounts for minor children can be set up as “custodial” accounts. For adult children they can be set up in the name of the adult child and, with the cooperation of the adult child, managed by you – the contributor.
In the next post I’ll review the DRIP accounts I set up for my adult children.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
Wednesday, November 10, 2010
How to Get Rich Slowly DRIP by DRIP: Asset Allocation
Asset Allocation and rebalancing are disciplines that force you to “buy low and sell high” without trying to time the market. For them to work you must be invested in two or more uncorrelated products (investment vehicles) – preferably negatively correlated (meaning that when one goes up the other goes down).
The Limits of DRIP Asset Allocation
DRIP investments are essentially limited to large-cap dividend-paying stocks, with a few international ADR’s and a few mid-cap stocks thrown in for flavor. Because of this limitation, diversification of asset classes is a matter of selecting dividend-paying stocks from different industries and countries.
My Diversification Plan
Currently, my DRIP portfolio contains:
1. HAS (Hasbro) – an American toy company
2. SJM (J M Smucker) – an American food company
3. CTL (CenturyLink) – an American telephone company
4. JNJ (Johnson & Johnson) – an American pharmaceutical & medical equipment company
I’m also planning to add:
5. BHP (BHP Billiton) an Australian mining company.
6. A suitable non-US oil & gas company.
My portfolio is reasonably diversified across industry sectors. However, it could be improved by the addition of an industrial like Nucor (NUC), a defense company like General Dynamics (GD), a utility like NextEra Energy (NEE), and a financial like Cincinnati Financial (CINF).
The Main Weakness of My Portfolio
My portfolio’s main weakness is its concentration in American stocks. This is an historical accident. As I learned more, I added to the portfolio. Plus, my primary Transfer Agent, Computershare, sponsors few international choices. BHP Billiton is offered thru Wells Fargo Shareholder Services. It’ll be my 1st foray into alternative DRIP Transfer Agents.
If I eventually add more companies to the planned 6-stock portfolio, I’ll focus on international companies. However, there’re some US based companies, like Coke (KO) that receive more than 70% of their revenue from outside of North America. I’d count them as international even if they’re headquartered in the US.
Assign Asset Allocation Percentages
Once a DRIP portfolio has been acquired, or perhaps chosen in advance, it’s time to decide what portion of the portfolio will be targeted for each stock and ADR. A simple even distribution works just fine. For example, if you have a five-stock DRIP portfolio you might assign a target of 20% of the total market value to each of the five stocks.
There’re no rules for this percentage allocation. It depends entirely on how you feel about the relative risk and return of each investment. You may consider your utility stock to be the safest investment and chose to allocate a higher percentage of the portfolio value to it. And, you might decide that your integrated oil company stock is certain to appreciate as oil supplies become more expensive world-wide. If so, your asset allocations might be 35% in the utility, 35% in the integrated oil and 10% in each of the other three stocks.
Again, there’re no rules except the ones you make. However, once made, change the rules seldom or the benefit of rebalancing will be lost.
Portfolio Rebalancing
Selling DRIP stocks is much harder and more expensive than buying them. That’s good. It encourages you to choose carefully, buy consistently, and hold your stocks for a long time. However, it also limits your flexibility in rebalancing your DRIP portfolio.
Your primary method of rebalancing is to allocate new money to stocks that are below their target values leaving those above their targets alone. This makes rebalancing take longer – spreading it out over a number of months of continuous investment.
Most financial advisors recommend rebalancing a portfolio every year. Some recommend every other year. Others advise watching the portfolio every month but rebalancing only when it gets out of balance by more than 15% or 20%.
The differences in advice are largely due to different approaches to getting the most benefit from the “buy low & sell high” discipline. Letting a “hot” investment run far enough to capture a significant gain before taking the gain is always a tradeoff with the timing of when the “hot” investment will cool.
Market timing being something few people can pull off consistently, you must establish a rule for when you’ll rebalance. Once established, this rule must be adhered to and seldom changed. Or, once again, you’ll lose the benefit of the rebalancing discipline and be no more successful at timing the market than the rest of humanity.
To Sum Up
1. Select a diversified portfolio of DRIP stocks & ADR’s based on industry and country.
2. For each stock choose a target allocation (a percentage of the portfolio value) and change the targets reluctantly.
3. Decide when, or under what conditions, you’ll rebalance your DRIP portfolio back to the target allocation percentages.
4. Execute the rebalancing as planned by redirecting your new monthly investments until the target allocations are restored.
The next topic will be using DRIP’s as gifts to children – or grandchildren.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
The Limits of DRIP Asset Allocation
DRIP investments are essentially limited to large-cap dividend-paying stocks, with a few international ADR’s and a few mid-cap stocks thrown in for flavor. Because of this limitation, diversification of asset classes is a matter of selecting dividend-paying stocks from different industries and countries.
My Diversification Plan
Currently, my DRIP portfolio contains:
1. HAS (Hasbro) – an American toy company
2. SJM (J M Smucker) – an American food company
3. CTL (CenturyLink) – an American telephone company
4. JNJ (Johnson & Johnson) – an American pharmaceutical & medical equipment company
I’m also planning to add:
5. BHP (BHP Billiton) an Australian mining company.
6. A suitable non-US oil & gas company.
My portfolio is reasonably diversified across industry sectors. However, it could be improved by the addition of an industrial like Nucor (NUC), a defense company like General Dynamics (GD), a utility like NextEra Energy (NEE), and a financial like Cincinnati Financial (CINF).
The Main Weakness of My Portfolio
My portfolio’s main weakness is its concentration in American stocks. This is an historical accident. As I learned more, I added to the portfolio. Plus, my primary Transfer Agent, Computershare, sponsors few international choices. BHP Billiton is offered thru Wells Fargo Shareholder Services. It’ll be my 1st foray into alternative DRIP Transfer Agents.
If I eventually add more companies to the planned 6-stock portfolio, I’ll focus on international companies. However, there’re some US based companies, like Coke (KO) that receive more than 70% of their revenue from outside of North America. I’d count them as international even if they’re headquartered in the US.
Assign Asset Allocation Percentages
Once a DRIP portfolio has been acquired, or perhaps chosen in advance, it’s time to decide what portion of the portfolio will be targeted for each stock and ADR. A simple even distribution works just fine. For example, if you have a five-stock DRIP portfolio you might assign a target of 20% of the total market value to each of the five stocks.
There’re no rules for this percentage allocation. It depends entirely on how you feel about the relative risk and return of each investment. You may consider your utility stock to be the safest investment and chose to allocate a higher percentage of the portfolio value to it. And, you might decide that your integrated oil company stock is certain to appreciate as oil supplies become more expensive world-wide. If so, your asset allocations might be 35% in the utility, 35% in the integrated oil and 10% in each of the other three stocks.
Again, there’re no rules except the ones you make. However, once made, change the rules seldom or the benefit of rebalancing will be lost.
Portfolio Rebalancing
Selling DRIP stocks is much harder and more expensive than buying them. That’s good. It encourages you to choose carefully, buy consistently, and hold your stocks for a long time. However, it also limits your flexibility in rebalancing your DRIP portfolio.
Your primary method of rebalancing is to allocate new money to stocks that are below their target values leaving those above their targets alone. This makes rebalancing take longer – spreading it out over a number of months of continuous investment.
Most financial advisors recommend rebalancing a portfolio every year. Some recommend every other year. Others advise watching the portfolio every month but rebalancing only when it gets out of balance by more than 15% or 20%.
The differences in advice are largely due to different approaches to getting the most benefit from the “buy low & sell high” discipline. Letting a “hot” investment run far enough to capture a significant gain before taking the gain is always a tradeoff with the timing of when the “hot” investment will cool.
Market timing being something few people can pull off consistently, you must establish a rule for when you’ll rebalance. Once established, this rule must be adhered to and seldom changed. Or, once again, you’ll lose the benefit of the rebalancing discipline and be no more successful at timing the market than the rest of humanity.
To Sum Up
1. Select a diversified portfolio of DRIP stocks & ADR’s based on industry and country.
2. For each stock choose a target allocation (a percentage of the portfolio value) and change the targets reluctantly.
3. Decide when, or under what conditions, you’ll rebalance your DRIP portfolio back to the target allocation percentages.
4. Execute the rebalancing as planned by redirecting your new monthly investments until the target allocations are restored.
The next topic will be using DRIP’s as gifts to children – or grandchildren.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
Thursday, November 4, 2010
How to Get Rich Slowly DRIP by DRIP: Diversification in a DRIP
Purposes
The purpose of a DRIP (Dividend ReInvestment Plan) is:
1. To growth your net worth with a combination of capital appreciation and reinvested dividends.
2. To supplement your income with a dividend stream that increases faster than inflation.
3. To do these things with minimum transaction costs.
The purpose of diversification is to reduce the risk to your net worth of a failure of any one investment or of a secular decline in any one asset class.
Limits of Diversification
These purposes restrict your investment choices to dividend-paying common stocks and ADR’s (American Depository Receipts). In practice, you’re also restricted to “large-cap” stocks; companies with a total market capitalization of more than $10 Billion. Market capitalization means the market value of all of the shares held by all shareholders.
Unfortunately, few mid-cap and small-cap stocks support DRIP’s.
In addition, I’m restricting myself to DRIP’s with minimum follow up investments of $50 per transaction or less; with a strong preference for $25 or less.
Consequently, the opportunity to diversify your DRIP holdings is limited. You can, however, choose to set up DRIP’s with companies in different industry sectors and from different countries.
My Diversification Plan
Currently, my DRIP portfolio contains:
1. HAS (Hasbro) – an American toy company
2. SJM (J M Smucker) – an American food company
3. CTL (CenturyLink) – an American telephone company
4. JNJ (Johnson & Johnson) – an American pharmaceutical & medical equipment company
I’m also planning to add:
5. BHP (BHP Billiton) an Australian mining company.
6. A suitable non-US oil & gas company.
Ideal Portfolio Size
I think a DRIP portfolio of from 5 to 10 stocks is ideal. More than that would be cumbersome – you’d be better off using a brokerage account.
Less than 5 is okay – especially at first. But, I think your intention should be to diversify over time. It really doesn’t require more money to diversify your DRIP portfolio. You just have to allocate where your monthly investment money goes. For example, if you have only $25 per month to invest, you can invest in a different stock each month or each quarter or each year. You’ll end up with fewer shares of each stock but with the same investment stream you can have a five stock portfolio instead of just one.
Speaking of allocating your investments – the next post will cover Asset Allocation in your DRIP portfolio.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
The purpose of a DRIP (Dividend ReInvestment Plan) is:
1. To growth your net worth with a combination of capital appreciation and reinvested dividends.
2. To supplement your income with a dividend stream that increases faster than inflation.
3. To do these things with minimum transaction costs.
The purpose of diversification is to reduce the risk to your net worth of a failure of any one investment or of a secular decline in any one asset class.
Limits of Diversification
These purposes restrict your investment choices to dividend-paying common stocks and ADR’s (American Depository Receipts). In practice, you’re also restricted to “large-cap” stocks; companies with a total market capitalization of more than $10 Billion. Market capitalization means the market value of all of the shares held by all shareholders.
Unfortunately, few mid-cap and small-cap stocks support DRIP’s.
In addition, I’m restricting myself to DRIP’s with minimum follow up investments of $50 per transaction or less; with a strong preference for $25 or less.
Consequently, the opportunity to diversify your DRIP holdings is limited. You can, however, choose to set up DRIP’s with companies in different industry sectors and from different countries.
My Diversification Plan
Currently, my DRIP portfolio contains:
1. HAS (Hasbro) – an American toy company
2. SJM (J M Smucker) – an American food company
3. CTL (CenturyLink) – an American telephone company
4. JNJ (Johnson & Johnson) – an American pharmaceutical & medical equipment company
I’m also planning to add:
5. BHP (BHP Billiton) an Australian mining company.
6. A suitable non-US oil & gas company.
Ideal Portfolio Size
I think a DRIP portfolio of from 5 to 10 stocks is ideal. More than that would be cumbersome – you’d be better off using a brokerage account.
Less than 5 is okay – especially at first. But, I think your intention should be to diversify over time. It really doesn’t require more money to diversify your DRIP portfolio. You just have to allocate where your monthly investment money goes. For example, if you have only $25 per month to invest, you can invest in a different stock each month or each quarter or each year. You’ll end up with fewer shares of each stock but with the same investment stream you can have a five stock portfolio instead of just one.
Speaking of allocating your investments – the next post will cover Asset Allocation in your DRIP portfolio.
Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP
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