A “2022-Proof” Dividend Strategy Every Investor Should Use

If this mess of a market has taught us anything (and it’s fair to say it’s taught us many things!), it’s the value of dividend reinvestment plans (DRIPs).

DRIPs are always a popular topic here at Contrarian Outlook—they’re a smart “set it and forget it” way for us to plow the payouts we don’t need back into our favorite dividend-paying stocks.

Markets Crackups Make DRIPs Profitable

At their core, DRIPs essentially take dollar-cost averaging (which you likely used to build your portfolio) and apply it to our dividends. By reinvesting a fixed amount of dividend cash at specific times (i.e., when your quarterly or monthly payouts roll in), you’ll naturally buy more stocks when they’re cheap and fewer when they’re pricey.

And with the S&P 500 falling 12.4% from the start of the year to its trough, before the recent bounce-back cut that loss in half, investors who’ve “timed” their buys through DRIPs over the first quarter have gotten some sweet deals indeed.

My Take? Use DRIPs—Then Go One Step Further

You can boost your DRIP gains (and income) further when you add to your regular DRIP buys by setting aside some dividend cash for a special moment. You can either reinvest this cash in the same stocks or target new dividend opportunities.

I call this my “DRIP+” strategy, and every month in my Contrarian Income Report service, I give you a table of my top picks from our portfolio for you to put this cash (or any new money, for that matter) to work.

In our July 2020 issue, for example, we rolled out seven picks in our monthly best-buy table. Among them was pipeline operator ONEOK (OKE), which was throwing off an outsized 11.8% yield at the time.

Let’s say a hypothetical CIR member we’ll call Cathy had some dividend cash she’d squirreled away from our other portfolio holdings and used it to take a position in ONEOK back then. By now, Cathy has banked $6.54 a share in dividends on a stock she bought for around $45. That’s nearly 15% of her original investment already recouped through dividends—not bad!

And while her dividends rolled in (red arrows on the chart below), she’d have enjoyed strong price gains, with ONEOK shares up 58% since then on price alone. Add reinvested dividends and Cathy’s total return jumps to 84%.

Now let’s take it one step further and say Cathy invested $1,000 of her OKE dividends back into the company through a DRIP. This is where the real magic happens, because thanks to her DRIP, she never has to worry about overpaying. She can thank OKE’s restless share price for that.

The overall trend has been up, which makes sense as the stock tends to move with oil prices. But like oil prices, OKE pulls back from time to time, due to wars, virus waves, supply shortages or whatever.

Investors who bought into OKE through a fixed regular investment were the big winners from this price action. Let’s swing back to our Cathy, with $1,000 flowing into OKE every time the company drops a dividend into her account.

On August 14, 2020, the date of OKE’s first dividend payout after our buy, her dividend would’ve gotten her 34 shares at around $29, which yielded 12.6% at the time—even higher than when the stock made our best buy list in June.

Fast-forward to the February 14, 2022, payout and with oil prices on a tear, OKE has now more than doubled since her Cathy’s first DRIP buy, hitting $63. Her $1,000 would’ve gotten her 15 shares and a 5.9% yield. She didn’t have to worry about timing the market and she certainly didn’t have to worry about overpaying—her methodical DRIP strategy kept her cool when prices ran hot.

And if Cathy still had some extra cash to work with during her holding period, great! If she wanted to deploy it into OKE, she could have done so on every price dip, enhancing her returns even further.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.

Disclosure: none