So, I know I’ve talked about my love of Annaly Capital Management (NLY) for investment purposes, and not just because you need to spell it reeeeaaaaallly carefully. See that conversation here. Again, please let me know if I’m wrong about the eventual tax benefits of REITs.
An additional component of my long-term plan for NLY is the ability, particularly in tax deferred or exempt accounts, to DRIP. That stands for dividend reinvestment plan – the definition of which is here. While I don’t hold NLY directly as a DRIP stock, you can reinvest your dividends through Vanguard, so the difference is nil. In essence, you’re just looking for the ability to use your dividends to buy more shares of the same holding without additional transaction fees.
This is particularly powerful for a REIT like NLY because the intent (and legal requirement) of the REIT is to return at least 90% of its taxable income to shareholders. This isn’t a stock which is intended to appreciate in share price over time, but the dividend can be high. NLY is about 11% depending on when you bought it. This is a key factor in my plan, because for a minimal initial cash outlay and a long time horizon, a large dividend can buy more shares of a theoretically relatively stable-priced stock. Since inception in 1997, NLY has traded between $7.25 and $20.65 per share, which is a reasonably narrow spread. It’s currently at about $8.66 per share – toward the bottom of that range.
For the purposes of illustration, I recently (06/20/2019 if you care) bought an additional 1,016 shares at a price of $8.85/share with a $7 transaction fee, for a total cash outlay of $9,001.04. I did this in my rollover 401k, bringing my total number of shares in that tax advantaged account to 3,302 which is about one third of that account’s value. THIS IS A RISK. But I’m aware of the risk and comfortable with it – though your comfort level may vary. This means that at the current ($0.25 per share per quarter) dividend level, and the current ($8.66) share price, my current holdings in this account will buy an additional $846.79 worth of shares – or roughly 97.8 shares PER QUARTER. And more in time as the shares purchased with the quarterly dividend purchase more shares.
As in most long-term investments, however, the real power of this is in compounding over time. This quarter my 3,387 shares will buy me 98 shares. Next quarter my 3,392 shares will buy me 100 shares. Over time this will accelerate growth as shares purchased with dividends buy more shares. Running it through a DRIP calculator online (assuming the share price and dividend don’t change and I don’t put any other money in), my 3,302 shares at a $30,543.50 holding value will grow in 5 years to 5,275 shares at a $51,028 holding value. Not a bad return.
More importantly for my FIRE purposes though is the income. If, at the end of that 5 years I want to retire and I’m able to get access to those 401k funds, those 5,275 shares will be kicking out $5,275 per year. Which could be a significant portion of my income, or could be allowed to continue to grow. Using the rule of 72, defined here, money at 11.7% will double every 6.15 years – which is most likely a looooooot faster than I could clear a net post-tax $30K in savings. For grins, I input all the same assumptions and extended the timeframe to the year of my full retirement age (in 2043). The holding value would have grown to roughly $418,373…which is a lot. And that would all be tax-free growth in a tax advantaged account and could kick out $43,246 per year in dividends. Which is more than my current post-tax income.
All of this is why I’m a fan of high-dividend investing, particularly on a lower or median income.
