August was not great for stocks. Luckily, I was traveling in Morocco for most of it and did not turn on my phone the entire time. I highly recommend unplugging a few times a years. This financial blog is about long-term investments, so even though the volatility seems relevant, its impact on my goals are minimal.
Having said that: Stocks down, yields up, that’s the way I like to DRIP (Luda Financial). Since yield is inversely correlated with price, bad months are the best months for my hypothesis.
Let’s say Cover Call Financial announces a $1 dividend per share on September 1st that will be paid on the 15th of September. Cover Call Financial is currently trading at $100.
$1 / $100 = 1%
CCF’s dividend yield is 1%
Then, CCF strikes a deal with Amazon to do… I don’t know, stream soccer or something. The stock blows up to $150 on September 4th. However, the dividend is still $1 per share.
$1 / $150 = 0.67%
CCF’s dividend yield is now 0.67% (which is quite a bit lower than 1%)
As you can see, an increase in price lowers the yield. If you are planning on holding and DRIPing this for years, a huge price increase is actually not all that great for your portfolio in the long-run.
Then, on September 12th, CCF announces that soccer isn’t a very big deal in America. The price tumbles to $50.
$1 / $50 = 2%
CCF’s dividend yield is now 2%, twice as high as 1%.
On September 15th, you own 100 shares of $50 CCF. Each share pays you $1, so you receive $100 cash, but in lieu of cash, you receive 2 shares of $50 CCF ($100 dollars / $50 per share = 2 shares, that is the DRIP ordeal).
Now, if the stock was trading at $150, you would have STILL received $1 per share. The change in price does not impact the dividend. So you would still receive $100 from your 100 shares, but in lieu of cash, you get .67 shares. ($100 dollars / $150 per share = .67 shares).
Even though a stock increasing in price makes you feel warm and fuzzy, the reality is that the higher the price, the lower the yield. Concerning compounding interest and my Dividend Portfolio Hypothesis, I actually rather the stock tumble to $50 so that I get 2 shares instead of it blow up to $150 where I would receive .67 shares.
The caveat is that a huge decrease in price may indicate weak financials. This is not always the case, but a lower price can have some negative impacts. One example is negatively impacting the company’s ability to borrow money. A bank is going to give CCF a rate at which it can borrow and that rate will reflect the riskiness of the stock. At $150 per share, a bank may basically offer free loans because they are certain the company will pay it back. However, if they tumble to $50, the bank may think they are too risky and offer a high rate in order to compensate for the risk that the company may not be able to pay the loan back.
August Recap: $900.29
LTC continues to rise. As you can see, as the Settlement Price increases, the Yield has decreased. I have about 9 more months of investing in this stock.
APLE continues to fall. You can see as the Settlement Price decreases, the Yield has increased. Even though the price is steadily falling, I believe the stock is merely following the market. I plan on holding this for years, so even though the drop in price is hard to stomach, I feel I am buying these shares at a discount.
If you understand this article, try using the GAIN table to apply your knowledge. Feel free to comment or email with questions or ideas