Update: I received an email indicating PG has left Computershare for Wells Fargo Shareowner Services and is raising fees. I find this disappointing as we’ll need new accounts at WF. Because of the fees I no longer recommend the Procter & Gamble DRIP. Revolt Against Fees!
For information on how to transfer shares out of a DRIP, see my post on it here.
Instead of new DRIPs, I now recommend M1 Finance. It’s now 100% free to buy and sell stocks. No commissions. No trading fees. Very easy to dollar cost average into stocks or ETFs.
Hard to believe it’s 100% free? Read my full M1 Finance review here to learn why they believe the future of personal finance is free.
One of my financial goals for the year was to end the year owning at least 20 different stocks in my taxable portfolio. I am still working to further diversify my dividend growth stock portfolio, a lesson I learned during the financial crisis when I was overweight two financial stocks and they severely cut their dividends. This most recent purchase brings my new total to 17 stocks in my portfolio.
Recently, I initiated a new position in the Procter & Gamble DRIP. There’s been some healthy debate in the dividend blog world about whether or not dripping and automated reinvestment is the best strategy.
I participate in DRIP programs through transfer agents and selectively buy shares in my traditional brokerage account using dividends received. In the case of Procter & Gamble, I decided to go with the DRIP to build a position slowly through periodic purchases and reinvestment.
After I describe why I’m buying Procter & Gamble, I’ll go into detail as to why I chose the DRIP program instead of buying it in larger bites.
Why the Procter & Gamble DRIP?
There is no such thing as a no-brainer when it comes to investing. But the Procter & Gamble DRIP comes close. It’s a must own for dividend growth investors over the long-term. Here’s a few statistics from their website:
- 176 years in business
- Products in 180+ countries
- 58 straight years of dividend increases
- 25 different brands generating a billion in sales each
- $84 billion in total annual sales
The 25 individual billion dollar brands stat is impressive. These brands will not shrink over the next 20 years, they will grow. Brands of this company include Tide, Bounty, Pampers, Cascade, Charmin, Braun, Oral B, Duracell and Vicks (I just bought some Vicks Nyquil for my cold). All of this is stuff many of us use every day. If you buy the store brand equivalent, Procter & Gamble frequently makes those as well.
The company recently announced a 7% dividend increase. Over the past 5 and 10 years respectively, Procter & Gamble has increased its dividend by an average rate of 8.8% and 10.6%. The new annual dividend amount is 2.5744 per share, yielding 3.19% as of Friday’s close.
The trailing 12-month PE ratio is 21.69 and the forward PE is 17.71. Analyst estimates for the next 5 years indicate an earnings growth rate of 8.7%, suggesting that the dividend growth rate can likely continue in the high single digits.
I am not an active or nimble trader. During the day, I have access to my phone to look up quotes and make trades, but I have a job that does not involve the stock market. At times, I’ll set a limit order to buy a stock in the evening and then wait for it to execute the next day, but I find this method to be challenging, often buying high in a down market day, or not executing the trade at all.
For a long-term investor like me, a difference of $0.50 per share on a purchase price shouldn’t matter. But then again, entry price does matter in dividend growth investing.
In early February, Procter & Gamble dipped to around the $76 level. It was a great opportunity to buy, but I missed it. The stock price quickly recovered into the high 70’s and low 80’s shortly after the dip. In fact, it has dipped three times to that level in the past 12 months (see chart below).
Procter & Gamble’s beta stands at .4, meaning that it is less volatile than the market (1.0). In other words, Procter & Gamble trades in a tighter range than the market and infrequently dips to cheap levels or rises to dear levels. The dips of a great dividend growth stock often don’t last.
As a stalwart company that trades with low volatility, it is difficult to buy this stock cheap. It trades at a premium because there are so many buy and hold investors and employee owners who enjoy the consistent dividend.
Since I’m a slowpoke investor and good opportunities to buy this company at a discount are scarce, I’ve decided to start a DRIP to slowly build my position over the next few years, reinvesting the dividends to further increase my shares.
Once I feel it is a comfortable percentage of my portfolio, I’ll then selectively invest my dividends elsewhere. If I continually wait around for a better price, I may never get it, or I could miss it again. I’d rather set it up to invest on autopilot and watch my position grow.
The Procter & Gamble DRIP is administered by Computershare. One upside is that I already have a number of holdings through them including, Coca-Cola (KO), Chevron (CVX), Emerson (EMR), Bank of America (BAC) and Aqua America (WTR).
I don’t need to open a new account to start this Procter & Gamble DRIP, keeping my logins to finance websites under control. A downside in comparison to my traditional brokerage account is that the dividends I receive will be reported to the IRS separately, burdening me with another 1099-DIV at tax time. I’ll also need to track my cost basis. Neither issue bothers me as I already do this for my other holdings. Plus, I don’t plan to sell Procter & Gamble for at least 20 years.
Another huge plus to this move this that the Procter & Gamble DRIP has no fees if I use automated bank drafts and don’t sell. So I’ll slowly build my position over the next few years at no cost, dollar cost averaging and reinvesting my dividends to lower my cost basis. I’ve had a lot of success building positions like this is the past so I’m confident this strategy will be positive for my retirement plan.
One other downside to this purchase is that my portfolio is already heavily weighted toward consumer goods. I wrote about this in a post called Developing a Game Plan Using Sector Weighting. For the remainder of this year, I’ll be analyzing my sector weightings from time to time and adding where I’m underweight.
Even though Procter & Gamble is another consumer goods company, I am quite comfortable adding it to my portfolio and I can aim to buy other sectors later in the year.
High School Economics 101
During my senior year in high school, I took an economics class and first started learning about investing. That class is what led me to major in finance in college. As an exercise, we all picked a stock at the beginning of the semester to see how it performed.
I chose Gillette based on I’d heard of it when I was looking at the G’s in the stock section of the newspaper. Years later in 2005 Gillette was merged into Procter & Gamble.
I didn’t buy Gillette with any real money, only fake classroom dollars. But I continued to follow the stock regularly until it merged. While studying Gillette in my class and reading books by Peter Lynch I realized the power of strong brands.
A few years later, and after some college marketing classes, I started investing in Coca-cola. Coca-cola is the second oldest holding in my portfolio behind Chevron. But I never bought any Gillette or Procter & Gamble.
Well, that ends now. I’ve opened my new position in the Procter & Gamble DRIP with a $500 starter purchase and I’ll be initiating automatic purchases every two weeks in the amount of $50. That way I’ll be buying $100 worth of Procter & Gamble per month.
If the market or the stock hits a slump, my purchasing power will increase and I’ll likely increase my purchase amounts, or make one-time purchases. At a price of $80.76 (Friday’s close), Procter & Gamble is down 5.9% from its 52-week high.
While not great, I’m OK with that because of the reasonable PE ratio, strong brands, and superb history of increasing dividends. Over time, dollar cost averaging into Procter & Gamble will make it a reliable income producing asset well into retirement.
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Do you own Procter & Gamble? Did you use the Procter & Gamble DRIP program or buy it in big lots? How long have you been a shareholder?
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