The Two Thieves of Returns

Matthew Carr By Matthew Carr, Emerging Trends Strategist

Dividend Investing
dividend-reinvestment-plan-drip-two-thieves-of-returns

Many of us crucify ourselves between two thieves – regret for the past and fear of the future.”

– Fulton Oursler

Fear is a powerful thing.

It can be irrational, hateful and a host of other negatives. But it can also inspire our survival instincts.

Investors are often hounded by Oursler’s two thieves – “regret for the past and fear of the future.

Every investor is haunted by the specters of missed opportunities… the “should’ves” and “if onlys.” We regret when we hold on to a particular stock for too long and get burned, are overleveraged, or don’t act at market bottoms.

Of course, there’s also the looming, daunting fear of the future: When will the bull market end… when will it all come crashing down… will my portfolio be able to survive?

Often what happens is that we are bullied by these two fears into inaction. We do nothing.

And it’s a downward spiral.

For instance, last week, I presented at The Oxford Club’s 17th Annual Investment U Conference in St. Petersburg, Florida.

The theme was “Is America on the verge of a new Golden Age?” Many of the speakers argued that the slow recovery since the financial collapse still provides opportunities in the market. The United States is seeing the unemployment rate decline, while job openings are at a 14-year high. The economy is continuing to improve as the country regains its footing. Americans have never been wealthier. People are living longer.

But, despite all of the positives, a poll from attendees showed 62% don’t agree with this. They think the U.S. is heading for a decline. And, of course, they think the stock market is overvalued and poised for a collapse.

Brilliant or Worthless? Fear of a Coming Correction

That fear over the damage done by the financial crisis six years ago still looms large in investors’ minds…

As I waited in the airport to head back home from the conference, I read an article by Henry Blodget.

For quite some time now, Blodget has been one of several calling for a massive correction in stocks.

His argument is purely a valuation one: that stocks are too expensive. That the market is pricier than it’s ever been, except for a few months in 2000.

Blodget is a long-term buy-and-hold “indexer.”

And the most recent change to his portfolio is to stop reinvesting dividends… to shut off the dividend reinvestment plan (DRIP).

He doesn’t want to buy new stock at what he sees as current expensive prices. He wants to put those dividends to use later… after the market corrects the 30% to 50% that he’s forecasting over the next couple of years.

He can then fold that cash back into his obliterated dividend payers at a value.

Blodget also thinks stocks will underperform their long-term averages over the next seven to 10 years – returning a mere 2% per year.

But for a long-term investor, is it really a viable strategy to wait for a correction? Likely not.

A Strategy for a Legend That Doesn’t Exist

The power of a DRIP is the compounding. Adding more shares incrementally increases the dividend payout as well as the power to own more stock.

I tested investing $100,000 in Exxon Mobil (NYSE: XOM) – a great long-term dividend-paying blue chip. I ran one portfolio with a standard long-term DRIP. The other, I just collected dividends and waited for big pullbacks to buy more shares.

In the DRIP portfolio, I invested $100,000 in Exxon Mobil at the start of the new millennium. I got 1,284.109 shares at $77.875.

Today, that portfolio is worth $307,493.40 and I now own 3,664.9988 shares. That’s a quarterly payout of $2,528.85 at the current rate of $0.69.

It’s also a gain of 207.5% on my original $100,000 investment.

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In the other portfolio, where I waited for major dips in Exxon shares to purchase new shares with the dividends collected, my total portfolio value is $307,763.88 with 3,668.22 shares.

That’s another gain of 207.5% on my original $100,000 investment.

I made six purchases over the last 15 years, purchasing at major lows and collapses… and also purchasing at the lowest dollar value over that span.

My last purchase, of 341.96 shares, was on Friday at a new 52-week low of $82.68. And shares of Exxon had fallen 21.08% from their previous 52-week high.

The fact is, it made no difference.

The portfolio where I waited to purchase new shares would, in reality, be worse if it weren’t for the ability to look back and buy shares at their lowest points throughout the years when the pain had reached its most extreme. Any purchases made at any different cost would have a profound effect.

So, Blodget is afraid. He’s closing the spigot on his DRIPs in an effort to maximize his purchasing power later…

He knows he’s at risk of looking like a fool.

Because what if the market collapse doesn’t happen for years? What if the market keeps churning higher?

A DRIP will keep purchasing shares during that time, adding to its purchasing power at those market lows while collecting those dividends and stockpiling the increases.

Bottom line: The only way to be successful versus the DRIP – if you’re a long-term buy-and-hold investor – is to be a master at attacking only at the lowest of the lows: a market timer of legendary status.

As a dividend investor, don’t let Oursler’s two thieves – regrets over the past and fear of the future – cloud your judgment. You have to let the power of your investment strategy work in your favor.

Good investing,

Matthew