Stocks Down, Yields Up, That’s the Way I Like to DRIP

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.

Lemme explain:

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

Capture.PNG

LTC

Capture.PNG

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

Capture.PNG

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.


GAIN

Capture.PNG

If you understand this article, try using the GAIN table to apply your knowledge. Feel free to comment or email with questions or ideas