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Common Stock Strategies Part 3: DRIPs, DSPs and Other Plans

By: , dated January 25th, 2013

DRIPs and DSPs

Some stock strategies focus on reducing brokerage commissions in order to boost overall returns. Direct Stock Purchase plans (DSPs) let you buy shares of stock directly from the company, without the use of a brokerage (and without the commission they charge). DSPs are a good way to invest since you don’t even have to be a current shareholder in order to purchase the shares. The company will not charge you a commission, but they may charge you a small fee in order to set up a stock purchase account.

Dividend Reinvestment Plans (DRIPs) are also a good way for you to bypass a broker and save on commissions by investing your money directly with the company; however, with DRIPs you must purchase the first share you buy in the company through a brokerage. After that, though, you’re free from the broker. The company will take whatever dividends it would normally send to you as a check and instead it will reinvest them to purchase more shares in the company for you, all without charging a commission. The only drawback is that you have no control over when your money from the dividends is used to purchase new stock in the company, which means you might be buying new shares at sub optimal times.

Note that DSPs and DRIPs are only offered by some companies, although there are hundreds of well-established blue chips offering such programs.

Dogs of the Dow

This is a very simple strategy in which you find out which ten of the Dow Jones Industrial companies currently have the highest dividend yield and then you purchase those stocks . These stocks are called the “dogs” of the Dow because they tend to have lower prices than the other Dow components, which means that they could experience substantial price increases in the next year. If you decide to use this strategy, it’s important for you to remember to reallocate your portfolio every year, since the dogs will change over time. Historically this approach has been successful, but there’s no compelling reason to believe it will continue to be.

CANSLIM

CANSLIM is a strategy for investing that was pioneered by William J. O’Neil, who later went on to found Investor’s Business Daily. The strategy is a mixture of fundamental analysis and technical analysis. Each of the letters in the acronym describes a different metric used to pick a stock:

  • C – Current Earnings: current earnings growth for the stock must be at least in the 20%-25% range
  • A - Annual Earnings: average annual earnings growth for the stock over the past five years should be substantial, around 25%.
  • N – New Things: the company should be involved in developing new services or products; this can sometimes even refer to new highs for the stock price.
  • S - Shares Outstanding: the company should have less than 30 million shares outstanding so that it has the potential for good growth.
  • L - Leading Stocks: the company should be a leader in its industry.
  • I – Institutional Ownership: the stock should have at least a couple of institutional shareholders (e.g. pension funds, endowments, etc.).
  • M - Market Conditions: the market should be moving upward or ready to move upward.

Most of the principals involved in CANSLIM investing make sense to experts. Of course, figuring out whether or not a company meets these seven criteria is a whole other story.

Contrarian

Contrarian investing is a strategy that relies on behaving in opposition to the prevailing wisdom; for example, buying when others are pessimistic and selling when they’re optimistic, or buying out-of-favor stocks and selling them when they’re popular again. In an extended bull market, the term contrarian can begin to mean someone who is bearish or prefers value stocks to growth stocks, although this is really just a subset of contrarian investing.

Insider Activity

Another strategy for investing involves looking out for what insiders at a company are doing with their stock. Keeping an eye on insider trades can be useful because it allows you to see what the people who have a large stake in a company are doing with their stock. These insiders are often the ones who know what is going on at the top levels of their company, and so they may have the best information about whether a company’s stock is actually worth more or less than the current price. Insiders can be either individuals or corporations. They are required to report both direct holdings (which are held in the name of the insider) and indirect holdings (which are controlled by the insider but are held by a family member, trust, company plan, or corporation with which the insider is affiliated). Note that we’re not talking specifically about illegal insider trading (that is, insiders who are trading based on privileged information), but instead about all types of insider trades, including when no such privileged information exists, but the insiders are just generally confident about the company’s outlook.

Other Investing Strategies

Constant Ratio System: Unlike the constant dollar system, the same percentage of funds is divided between different assets. When the balance is upset, it is periodically restored by moving money from overperforming assets to underperforming ones. This system prevents one asset class from dominating the portfolio. This is one way to maintain a desirable asset allocation.

Variable Ratio System: This is a variation on the constant ratio system that relies on market timing to shift the proportions of the various asset classes contained in the portfolio. Buying low and selling high is built into this strategy, but, like the constant dollar system, prolonged movements in a given direction will harm returns.

Bottom-up Analysis: This is a name for an investing strategy that focuses on the fundamentals of individual securities as opposed to the state of the overall economy.

For Part 1 of this article, please click here.

For Part 2 of this article, please click here.

This article was brought to you by the InvestorGuide Staff Writers and Editors.

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