Tuesday, December 8, 2009

Not too Late: Dividends, Boomers and Growing Wealth

Boomers should pay attention. As our portfolios age, common wisdom is to transfer our wealth to more conservative investments. Nothing is more conservative in the world of equities than companies who pay dividends. Not only is the return historically better the companies who pay, such as those in the Dow offer older and more stable investments allowing you to skip the middle man and buy directly.

Dividends offer the investor an opportunity to not only own a share of a company but also to share directly in that company's profits. As you may recall, when a company makes a profit, they have numerous options. Many businesses simply reinvest the money into the company. Some buyback shares with the profits or reduce their debt. But older, more established companies distribute those profits among shareholders.

Some even offer a dividend reinvestment plan or DRIP. And many of these plans allow you to receive the dividend in the form of more stock. These plans are an inexpensive way to increase your portfolio's value and do so without much in the way of effort on your part.

The best part of these types of plans is the cost. Not only is the purchase automated but buying stocks directly from the issuing company is also, in most cases, free of brokerage costs. Add to that, most companies allow you to begin the process with as little as $10. The automated feature of these plans also allows you to invest via automatic deduction from existing accounts you might own.

Involvement in this type of program allows you to purchase individual shares rather than taking a cash disbursement. This reinvestment can be set up in a variety of ways: full reinvestment (where any and all dividends are used to purchase more stock), partial reinvestment (designates how much of the dividend goes to buying additional shares and how much you want to receive in cash), or as a cash payment.

To enroll, you need to own at least one share in your name (if you are buying them for a minor, your name must be entered as the custodian). You can do this using an online brokerage or similar discount broker.

There are over 300 companies listed on the S&P 500 list that offer these sorts of options. All of the companies on the Dow Jones 30 offer either a direct stock purchase (DSP) which eliminates the need for a broker or a DRIP, which requires ownership of at least one share to begin the reinvestment plan.

Last week, Gina asked me what would an investor do with $25. Although I suggested opening an IRA directly with a mutual fund company (in large part because at least there are tax advantages in doing so), that same amount, invested every week could generate enormous amounts of profit for the investor as well. Keep in mind dividend payments create a tax event (although some allow them to be tucked inside your IRA).

Yet, considering the fact that dividend paying stocks generally outperform the overall market by 3%, this is an opportunity that has so much potential, you shouldn't pass it up.

Below is a list of the Dow 30 companies with dividends, direct stock purchase plans or dividend reinvestment plans.

3M Company (MMM) DRIP
Alcoa Inc. (AA) DRIP
American Express Co. (AXP) DSP
AT&T Inc (T) DRIP
Bank of America Corp. (BAC) DSP
Boeing Co. (BA) DRIP
Caterpillar, Inc. (CAT) DSP
Chevron Corp. (CVX) DSP
Citigroup Inc. (C)
Coca-Cola Co. (KO) DRIP
DuPont (E.I.) deNemours (DD) DRIP
Exxon Mobil Corp. (XOM) DSP
General Electric Co. (GE) DSP
General Motors (GM)
Hewlett-Packard Co. (HPQ) DRIP
Home Depot, Inc. (HD) DSP
Intel Corp. (INTC) DRIP
International Bus. Mach. (IBM) DSP
J.P. Morgan Chase & Co. (JPM) DRIP
Johnson & Johnson (JNJ) DRIP
Kraft Foods Inc. Cl A (KFT) DRIP
McDonalds Corp. (MCD) DSP
Merck & Co. Inc. (MRK) DSP
Microsoft Corp. (MSFT) DRIP
Pfizer Inc. (PFE) DSP
Procter & Gamble Co. (PG) DSP
United Technologies Corp. (UTX) DRIP
Verizon Communications Inc. (VZ) DRIP
Wal-Mart Stores, Inc. (WMT) DSP
Walt Disney Co. (DIS) DSP

Paul Petillo is the Managing Editor of Target2025.com and a regular contributor to MomsMakingaMillion Talk Radio. He is also a fellow Boomer.