What’s better than a DRIP – Dividend Reinvestment Program?

So what’s a dividend reinvestment program? That’s where a dividend paying company will allow you to take your dividends in additional shares of stock instead of dividends in cash. It doesn’t increase your return but it does allow you to build wealth through increasing shares of that stock. Hopefully that stock’s price is also increasing over time. So increasing how much you own while the price goes up is the classic way to build wealth. It’s a compounding activity. So now that the definition is in place – what’s better than that? Let me begin with what’s wrong with DRIPs. DRIPs cause you to build a position in one company stock – that is concentration not diversification. In investing, concentration is our enemy and diversification is our friend. What’s better is a highly diversified, low expense ratio mutual fund where you have directed your advisor or your custodian to reinvest profits and dividends. Now when those dividends come in, you are diversifying them into the entire fund – hopefully thousands of stocks. When I write highly diversified, I mean thousands of securities, not hundreds or tens. In our case, across the entire portfolio we exceed 10,000 stocks....

Economic Growth and Equity Returns

A study was performed looking at the relationship between economic growth as measured by GDP in the previous year and equity returns this year. In both developed and emerging markets, average annual returns were similar for high and low growth countries. In fact, low growth countries had slightly higher average returns than high growth countries, although this return difference was not reliably different from zero. In other words, there is no evidence that this return difference occurred by anything other than random chance. See the actual report with graphs and tables here.      ...