|November 26, 2014
How To Buy Cheaper Shares With Higher Yields... Automatically
By Amy Calistri
I recently paid $2.89 per gallon for gasoline. I didn't fill up the tank. But I did buy more gas at that price than I did the week earlier when gas was at $2.99 per gallon.
Many years ago, my father taught my brother and me about the benefits of buying less gas when prices were relatively high and more gas when prices were relatively low.
One of my father's passions was classic cars. At one point, my family owned two four-door 1966 Lincoln Continental convertibles. Their gas tanks held 25 gallons, which was a good thing. They needed those big tanks since they only got about nine miles to the gallon.
And maybe that's why dividend reinvestment resonates with me today.
From October 8 through October 16, the S&P 500 dropped 5.4%. When the market drops that dramatically over such a short period, it gives even the most disciplined investors pause. But where other investors panicked, I was able to buy more shares of stocks I own -- at cheaper prices and higher yields.
But I have to give credit where credit is due. It wasn't my disciplined nerves of steel that guided my hand during the market pullback. It was the automatic dividend reinvestment program set up on my brokerage account.
Dividend reinvestment is a discipline enforcer.
Dividend reinvestment operates on the same premise as my gasoline-buying strategy. When prices are lower -- and yields are higher -- it buys more shares of a security. When prices are higher, it buys fewer shares.
Let's look at two examples of how this worked in my favor during this recent market pullback:
Calamos Convertible & High Income Fund (Nasdaq: CHY) is a closed-end fund that owns a mix of convertible securities, high-yield bonds and other income securities.
The fund, which pays monthly dividends, is among my favorite holdings in my "High Yield Opportunities" portfolio. It's in what I call the high-yield "sweet spot." These are securities that don't have the absolute highest, or riskiest yields, but they have yields well above the average -- in a range that has proven to outperform the market over time.
- On September 15, my reinvested dividends bought 2.61 shares of CHY at a price of $14.36 per share. At that price, CHY had a yield of 8.4%.
- On October 15, my reinvested dividends bought 2.93 shares of CHY at a price of $12.876 a share. At that price, CHY had a yield of 9.3%. So during the pullback, I was able to buy 12% more shares of CHY than the month before -- at an 11% higher yield.
I count on securities such as CHY to maximize my income. And maximizing my income became that much easier when my reinvested dividends bought more shares at a yield of 9.3%.
Main Street Capital (NYSE: MAIN) is a business development company that offers debt and equity financing to smaller companies. Due to the way the business is structured, it is required by law to pay at least 90% of its income to shareholders in the form of dividends.
- On September 15, my reinvested dividends bought 1.808 shares of MAIN at a price of $32.44 a share. At that price, MAIN had a yield of 6.3%.
- On October 15, my reinvested dividends bought 2.206 shares of MAIN at a price of $27.54 a share. At that price, MAIN had a yield of 7.4%. During the pullback, I bought 22% more shares of MAIN than the month before. Better yet, I locked in a yield that was 17% higher than the prior month.
MAIN is in my "Lifetime Income Growers" portfolio (which I talked about in more detail here). This is the group I count on to maximize growth. Buying more shares of these securities though dividend reinvestment is like the gift that keeps on giving. The income stream generated by additional shares grows every time a Lifetime Income Grower raises its dividend.
MAIN has raised its dividend 36% since I first profiled it back in February 2010. And the next time MAIN raises its dividend, I'll get even more of a income boost -- thanks to the additional shares my dividend reinvestment program picked up for me during the market pullback.
So here's the takeaway. Using my gasoline buying strategy, I minimize the average price per gallon I pay at the pump. Using a dividend reinvestment strategy, I not only minimize the average price I pay per share -- but I also maximize income and growth.
Staying objective during a market pullback isn't easy. It's hard to pull the trigger to buy more shares when other market participants appear to be panicking. But you don't have to put yourself in that position. If you set up your investments to dividend reinvest, the discipline is automatic. And I'm all for any strategy that helps me maximize growth and income without lifting a finger.
Chief Investment Strategist
The Daily Paycheck
Editor's Note: When it comes to finding income investments, reinvesting dividends and knowing when to flip the income switch on your portfolio, there is no one better than Amy Calistri. Using her Daily Paycheck Strategy, four out of five of Amy's picks have made money. On top of that, she's been able to pocket (and reinvest) just over $1,400 per month from the dividends she's received. To gain access to her research and see how she's been able to accumulate over $72,000 in total dividends, simply go here.