Extra Dividend Strategy

Everyone using DRIPs to accumulate shares through dollar-cost averaging can appreciate the joy of watching their share count grow over time. But did you realize that when you make your quarterly investments can make a big difference in what you eventually accumulate?

No, we're not talking about "market timing," which involves guessing when the price will be at a low point. We are talking about the "Extra Dividend Strategy," which can help you to increase the amount of dividends that get reinvested each quarter.

While "capturing" the next dividend may seem like a minor concern, consider the implications over the long term. If you miss out on this strategy means that you lose in two ways. First, the dividend that you would have earned will not be invested this quarter...and will not compound for the next 20 or 30 years, if you own it for that long. Second, if you set up a quarterly investment program on the wrong schedule, you'll miss out on that "extra" dividend each and every quarter, and each and every one of those "lost" dividends will also fail to compound over the life of your investment.

We've written about this strategy over the years, but it deserves an update, in part because many DRIPs offer more flexibility these days. Originally, the rule of thumb was to make your quarterly investment in the month after a company paid its dividend, which would insure that your purchase would earn a dividend of its own no more than 60 days later. By doing so, you could be assured of having your shares purchased well before the next Record Date, which can vary anywhere from two to six weeks before the payment date.

This version of the strategy was predicated on the fact that most DRIPs allowed monthly investments. Nowadays, though, many DRIPs offer weekly (or even daily) investments, so you have a bit more flexibility in scheduling your checks, or may even be able to invest online. That means that you can often invest a bit closer to the Record Date and still earn the next dividend. But you need to be careful that you don't try to cut it too close!

There are two key dates to focus on: the Ex-Dividend Date, which is typically two market days before the Record Date, and the last DRIP purchase date prior to the Ex-Dividend Date. If you haven't made your purchase before the Ex-Dividend Date, then your purchase will not earn the next dividend. Depending on the plan specifics, you may be able to buy stock a few days or weeks prior to the Ex-Dividend Date, but giving yourself a small cushion (time-wise) is always a good idea. When mailing a check, it's best to do so 10-14 days before the DRIP investment date. When authorizing an electronic debit from your bank account, allowing 7-10 days should suffice.

There are two key dates to focus on: the Ex-Dividend Date, which is typically two market days before the Record Date, and the last DRIP purchase date prior to the Ex-Dividend Date. If you haven't made your purchase before the Ex-Dividend Date, then your purchase will not earn the next dividend. Depending on the plan specifics, you may be able to buy stock a few days or weeks prior to the Ex-Dividend Date, but giving yourself a small cushion (time-wise) is always a good idea. When mailing a check, it's best to do so 10-14 days before the DRIP investment date. When authorizing an electronic debit from your bank account, allowing 7-10 days should suffice.

Here's an example of a short "lag time" between Record and Payment Dates. AFLAC pays a dividend on August 31 to record-holders on August 18, with an Ex-Dividend Date of August 16. So you'd have to buy shares by August 13 to capture the dividend. Since its DRIP allows weekly investments, you should mail your check at the start of August, or earlier, to purchase shares on time to earn the August 31 payout.

Once you establish the best schedule for earning the next dividend, set up a quarterly pattern that follows that timing. For example, an AFLAC investor sending checks would note on his or her calendar August 1, November 1, February 1, and May 1. The Deere investor would schedule mid June, September, December, and March. The more DRIPs one has, the more "extra" dividends you can earn over your investing lifetime simply by scheduling your quarterly investments at the best time rather than the worst.