Automatic Investing In A Dividend Paying Stock (PepsiCo Example)

by Pete Green on 2011-07-041

When you’re not day trading, it’s easy to ignore the stock price and continue investing. Sure, most investors love to peek at the leader board as they continue to focus on the task at hand. You should do the same. Recall that by consistently making stock purchases, you will even out your actual costs. If you buy 10 shares at $10 each, and later buy 10 more shares at $20 each, your 20 shares cost you a total of $300. Specifically, that’s $300 / 20 shares = $15 per share, on average. Keeping to this strategy over the years keeps your price per share near the middle of the trading range, which is a good place to be. What’s even more encouraging for small investors is that you can build a decent portfolio with as little as $25 a week because dividend reinvestment programs, mutual fund systematic savings programs and even your company retirement plan allow you to participate in the market for so little. The longer you have to consistently add to your investments, the greater the potential for portfolio growth. Here is an example.

How I Developed My PepsiCo Position Through Automatic Investing

PepsiCo is one of my favorite DRiP stock companies. Growing up near their home base, I’ve learned to like Pepsi’s products and it’s actually my drink of choice. I acquired my first 5 shares in the fall of 1996, but by the time the paperwork worked it’s way through, it was summer of ’97.

I was barely 30 years old, made a decent living, bought a house, got married and had a kid. I didn’t want my child to start with nothing, the way I did. But I don’t want to give her everything either. However, when the time comes and she tells me she wants to start a business, or needs an investor for a project, it would be nice to cut her a check for 50 G’s. So I’ve invested as much as I can. Every week, I’ve set aside $25 to go into my investment portfolio. At that time, PepsiCo was my entire portfolio (yes, I was not diversified, but I was just starting).

By the time the paperwork cleared, I had $325 set aside, and sent it in. Pepsi was trading around $38.25 when I sent the money, but between snail mail, and corporate mail, (I wonder which is worse?) the purchase wasn’t credited until Aug 21st. The next purchase cycle was Sept. 4th, and my OCP (which stands for “optional cash payment” or cash contribution) obtained 8.9591 shares @ 36.276 each, bringing my total to nearly 14 shares.

My goal was to have the DRiP buy itself a share every year, and to “earn” my first full stock through the DRiP. After 3 years of steady investing, I finally reached my goals, as shown in the table below.

Statement Date
DRiP CASH Cash Stock Price DRiP Shares CASH Shares
  Open           5
7-3-1997 Dividends 0.125 0.63   38.2390 0.0165  
9-4-1997 OCP     325 36.2760   8.9591
10-10-1997 Dividends 0.125 1.75   38.8160 0.0451  
1-6-1998 Dividends 0.125 1.75   36.75 0.0476  
4-3-1998 Dividends 0.125 1.76   43.0140 0.0409  
7-6-1998 Dividends 0.130 1.83   41.241 0.0444  
8-31-1998 OCP     125 30.8989   4.0455
9-30-1998 OCP     175 29.9098   5.8509
9-30-1998 Dividends 0.13 2.37   29.9098 0.0792  
1-1-1999 Dividends 0.13 3.14   40.9014 0.0768  
3-1-1999 OCP     75 37.5625   1.9967
3-31-1999 Dividends 0.13 3.41   39.1080 0.0872  
6-1-1999 OCP     250 36.5355   6.8427
6-30-1999 Dividends 0.135 4.48   38.6278 0.1160  
9-30-1999 OCP     400 30.5807   13.0801
9-30-1999 Dividends 0.135 4.49   30.5807 0.1468  
12-15-1999 OCP     350 34.6875   10.0901
1-3-2000 Dividends 0.135 6.28   37.1892 0.1689  
2-29-2000 OCP     400 32.6207   12.2622
3-31-2000 Dividends 0.135 9.32   35.7548 0.2606  
Totals     41.21 2100 35.9602 1.13 68.1273

In March 2000, I achieved both goals and collected my first DRiP acquired stock while earning better than a 25% share each quarter. That’s one share exclusively acquired through a DRiP plan, every year. The goal is modest, but it’s quite encouraging and shows how a “get rich slowly” plan can work, thanks to the power of compounding and a smidgen of patience.

Because this was set up for my first born, and because my investment strategy was changing in 2000, the February OCP was my last. I received my quarterly statement in April of 2011, and did an evaluation of my transactions. Remember now, I have not made another cash investment since 2000.

Statement Date
DRiP CASH Cash Stock Price DRiP Shares CASH Shares
3-31-2000 Dividends 0.135 9.32   35.7548 0.2606 12.26

Net worth = $2,490.50

Statement Date
DRiP CASH Cash Stock Price DRiP Shares CASH Shares
3-31-2011 Dividends 0.48 40.95   64.94 0.6306  

Net worth = $5,604.63

You can see also, that when I quit investing additional funds in 2000, my average cost per share was around 35.75 each. In 2011, the stock price is $64.94, but my dollar cost average price remains under $40. Had I maintained investing in this stock all these years, my average would be higher for sure, but as the tables illustrate, investing over time helps level the cost per share.

This is just one company, with $25 per week invested over a period of 3 years. Imagine if you took that same $25 and invested it over 5 to 10 years, or even longer. $25 a week could conceivably be worth over $30,000! Now imagine if you have 2 or more companies, and you invest $100 a week.

Some Words of Advice

While you’re at it, don’t lose your bearings with your portfolio. Be prepared for a stock’s dramatic price movements — those price gyrations shouldn’t be a reason to sell your holdings. Remember that you are in this for the long haul, so let your money keep working for you. However, it is important to keep up with your portfolio. Make sure you still agree with the original reasons you purchased the stock in the first place. Is the company still relevant? Or is it becoming outdated and obsolete? Does the company continue to grow? Or is their debt significantly higher? Prune your portfolio prudently and regularly. The end of the year is often a good time to make adjustments. With the assistance of a CPA, determine your tax implications before selling shares of a company. It may make more sense to wait a few months before you sell a losing stock. If you do so, make sure you’re offsetting your capital gains.

Created January 11, 2009. Updated July 4, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.

{ 1 comment… read it below or add one }

Zero Passive Income July 13, 2011 at 1:08 pm

Thanks for the info Pete. I’ve been looking at investing in dividend paying stocks and this gives me a better idea of how they work.

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