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DRIP or Dry Powder? How to Best Deploy Our Dividend Profits

Wednesday, April 7, 2021 | Contrarian Outlook, Brett Owens

If you’re a regular reader, I owe you a big congratulations on the recent profits in your dividend portfolio.

Some of you are banking big yields. Others are riding dividend magnets to capital gains. A select group of savvy contrarians are profiting from payouts and price upside.

The result of your mini windfall, regardless of source, is cash. But this pile of money is not yet generating any income for us. So, what is the best way to employ these greenbacks? We have three options:

  1. Reinvest the dividend money automatically via DRIPs,
  2. Deploy the profits strategically via smart shopping lists, or
  3. Stack the dry powder for a special moment.

All three methods work. Really, there’s no wrong choice. I encourage you to consider the reinvestment plan that fits best with your personality, and simply stick with it.

Which to choose? Let’s consider the highlights of each.

Dividend Redeploy #1: Automatically via DRIPs

Dividend reinvestment plans (DRIPs) are always a popular topic here at Contrarian Outlook. These plans provide us with a simple “set it and forget it” way to plow the payouts that we don’t need back into our favorite dividend-paying stocks.

The idea here is that our extra income can be reinvested and create more income for us down the road. The allure of a DRIP is that it requires no oversight beyond our initial election “to DRIP.”

Traditional DRIPs simply take your dividends and plow them back into the stock or fund that issued the dividend. If your brokerage offers this option, it is a great way to grow your future payout stream without thinking twice about it.

Dividend Redeploy #2: Strategically via Smart Shopping Lists 

If you subscribe to one of my monthly dividend publications (Contrarian Income Report and Hidden Yields), you’ll recognize this table:

At the end of each issue, we highlight the best income ideas for new money. These are the stocks and funds in the current portfolio that I’m projecting to reward us with the highest total returns in the months ahead (dividends plus price appreciation).

This short list (from the June 2020 edition of CIR) worked out quite well. The yield on Synovus Financial (SNV), for example, is now less than 3%. Don’t worry, the dividend payment stayed the same and readers who reinvested money in SNV at that time are still enjoying a 6.7% yield on their cost.

It was the stock price that soared:

ONEOK’s (OKE) yield has likewise retreated from 9.8% to “just” 7.3% today. But like SNV, the dividend wasn’t reduced—the stock simply gained.

The monthly shopping list assumes your account is not automatically reinvesting dividends or that you are not adding new money. It requires a bit more work to maintain than a DRIP because you are choosing the best places for reinvestment at the time—not just the stock that paid the dividend.

For many investors, this extra step is worth it. We are able to cherry pick the very best dividend deals on the board and acquire more shares when prices are low (and yields are high) of those specials.

Then, as prices begin to rise, we can kick back and enjoy the run.

Dividend Redeploy #3: Stack the Dry Powder for a Special Moment

If you find yourself obsessed with timing the market, here’s the bad news. The market’s next move (up or down) is usually a coin flip.

Now, the good news. It is a weighted coin! Bear markets typically last months while bulls run for years. Long-term, the direction of the market is up.

Plus, the best buying opportunities usually appear after a “bear refresh.” Of course, April 2020 comes to mind, but let’s not forget that October 2020 was also a pullback that provided us with an amazing “double discount” opportunity.

In our October issue of CIR, we recognized that:

  • The broader market had pulled back about 10% from its recent highs.
  • However, there were stock-focused closed-end funds (CEFs) trading at 15% discounts to their net asset values (NAVs)
  • These NAVs were made up of high-quality dividend stocks.
  • So, buying these CEFs in October was the equivalent of buying the S&P 500 index for less than 3000, when it was 3298 at the time:

Applying CEF Discount “Coupons” to An Already Discounted Market

Fast-forward seven months, and we have the S&P 500 above 4000. It’s up by nearly one-third. And the two CEFs we added in October’s CIR? They’re up by nearly one-third (including dividends) as well.

The shopping spree approach to dividend redeployment can deliver outsized profits in a short period of time. We are concentrating our buying power on the best dividend payers in the moments when they are the cheapest.

These moments, however, don’t last long and many investors lose patience waiting for them. But if you can bide your time, these income bargains can be worth the wait.

Dividend Buy Alert: 7 “Hidden Yield” Income Stocks

We actually have 7 recession-proof dividend stocks flashing “B-U-Y” as I write. These payout plays could very well enjoy 30%+ total return in the seven months ahead.

They are the perfect stocks to buy right now, and then DRIP once we have them. The important thing is to purchase them today, before they really take off. Seriously, don’t delay. Click here to get the names, tickers and target prices for these seven dividend moonshots.

Featured Article: What is a Lock-Up Period?

7 Precious Metals Stocks That Will Keep Your Portfolio On Trend

The growing acceptance of cryptocurrency is beginning to make mainstream investors rethink their idea of “store of value.” The trendy possibilities of Bitcoin, Ethereum, and any of the dozens of altcoins that exist on the blockchain are trending like the latest fashion.

However, the thing about fashion is that the more things change the more things stay the same. Just like the simple black dress that won’t go out of fashion, the same can be said for precious metals stocks. One way to think about it would be to say that the existence of a growing cryptocurrency market doesn’t change the value of precious metals.

Precious metals have long been known to be a safe-haven asset in times of market volatility and economic crisis. In fact, during the Covid-19 pandemic, gold prices surged about 30% breaking the $2,000 mark for the first time in its history. This was at a time when the prices of many cryptocurrencies were falling.

And precious metals have also been seen as a hedge against inflation, which seems like more of a certainty with the Federal Reserve’s pledge to keep interest rates at historically low rates into 2023.

Whether you’re looking to take your first steps at crafting a precious metals portfolio or if you want to fine-tune the one you have, we believe this special presentation is a good place to start your research. We’ve identified seven precious metals stocks that look to retain their allure in 2021.

View the "7 Precious Metals Stocks That Will Keep Your Portfolio On Trend".

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