In my Dividend Growth Portfolio (DGP), I reinvest dividends once each month, in the middle of the month.

Between reinvestments, I let dividends accumulate in cash to fund my next monthly purchase. The amount varies each month, but it is usually in the $400-500 range.

I have been recently adding to two new positions that I started this year, Merck (MRK) and Schwab’s U.S. Dividend Equity ETF (SCHD).

Right now, the latter is a little over-priced, but Merck is still undervalued. So I decided to add to it and continue to build it as a position in my portfolio.

Why Merck?

Merck is a very high-quality company. Here is its Quality Snapshot. Its total score of 24 points falls just one point short of “perfect” on this method of judging a stock’s quality.

Besides its quality, here are some other factors I took into account in deciding on Merck. This table includes not only the Quality Snapshot shown above, but also other metrics that are important to me.

Especially note the undervaluation of Merck’s shares. Merck’s price has been moving basically sideways since early 2019, even though its earnings have been rising steadily.

That sideways movement of Merck’s price is OK with me, because I am accumulating its shares.

Long-term, once I own a substantial position, I will want Merck’s price to rise along with its earnings. But short-term, while I am building my position, I’m happy to see it remain “dead money” for a while longer.

That puts me in league with Warren Buffett:

The logic is simple: If you are going to be a net buyer of stocks in the future, … you are hurt when stocks rise. You benefit when stocks swoon.

As I’ve stated before, finding a high-quality stock with rising earnings and a flat price over the past few months or years has become one of my favorite scenarios for establishing a long-term position.

The Purchase

Here’s the summary of the purchase. It was financed by dividends I have been accumulating over the past month.

Impact on My Portfolio

Here is how the total Merck position will appear in my portfolio table when I update it at the end of the month. New information is highlighted in yellow.

Focusing just on income, here’s the impact of adding the six additional Merck shares:

The seven additional shares of Merck will add $18 to the portfolio’s annual dividend flow, or about 0.3%. That’s just enough to kick the DGP’s yield on cost (YOC) up to 10.9%.

And now for my monthly lecture about dividend reinvesting: I know that $18 / year sounds small, but if I make 12 such reinvestments per year, that amounts to more than a 3% increase in income without doing a thing other than reinvesting the dividends. That increase from reinvesting comes on top of the annual increases from the companies themselves.

That’s how compounding works. Compounding means to earn more money from money already earned. I will be making more money ($18 additional per year) from money already earned (the dividends that I just reinvested).

This purchase is in plenty of time to get Merck’s Q3 dividend on the new shares, which is payable in October.

Closing Thoughts

These monthly dividend reinvestments are perfect examples of how compounding works behind at its most basic level: Adding new shares using money received (via dividends) from shares already owned.

The monthly reinvestments are also examples of opportunistically investing in excellent companies at attractive prices. It is always fun to find a high-quality company that fits my investing goals when it is on sale.

That’s generally how I invest. I keep surveying the landscape for companies that fit my needs and are well-valued, and I grab them when I have dividends to reinvest.

I don’t care what order I buy stocks in. Over time, positions grow naturally via purchases made at good prices. I like to do that rather than “chase” one or two stocks in a concerted effort to grow them. Instead, I “chase” quality and value wherever they may be. Over the long haul, that results in a diversified portfolio.

Here is my reinvestment program so far this year. You can see that I’ve been spreading the money around, including using reinvestments to start three new positions.

Please note that the table above has been re-defined to show only dividend reinvestments. I cleaned up the January entry to eliminate “extra” purchase money that had come from the sale of a stock.

From now on, I will present my dividend reinvestment and portfolio management activities separately. I think that will provide a clearer picture of how I run the portfolio.

After buying the seven Merck shares this month, I have $58 in cash left over. That begins the accumulation of cash for September’s reinvestment.

— Dave Van Knapp

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Source: Dividends and Income