Set it and forget it

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DRIP Dividends and ‘Forget It’ for Big Returns

I frequently riff on the original sin of trading too much. It’s a fault all traders must guard against — even those who are the best at this Wall Street game. That’s not just because the fees will eat into your returns, but also because human psychology often tells investors to do the wrong thing; we panic and sell low or we get giddy and buy a top.

So it’s worth ending 2012 with a plug for a strategy that I think will not just be good for the new year, but for decades to come — the so-called DRIP strategy that’s advocated by folks like Charles Sizemore of the Sizemore Investment Letter.

DRIP stands for “dividend reinvestment plan,” where an investor buys a stock with a decent yield, then reinvests those dividends in the company. The benefits are twofold — averaging in to smooth out your returns a bit, and increasing the dividends you get each time because you keep increasing your shares.

Obviously, this kind of strategy only performs in the long-term, so you get the dividends each quarter. But don’t think it’s a sleepy strategy with no potential for outsized returns.

Take a look at the stocks in the Sizemore Investment Letter’s “DRIP and Forget Portfolio” during the past two or three years, and you’ll see what I mean:

That’s quite a lineup, with the majority outperforming the broader market handily. The Dow Jones Industrial Average is up about 27% since Jan. 1, 2010.

Here’s what Charles has to say about some of his picks:

As we close out 2012, some of these positions are looking a little stretched. I wouldn’t allocate new monies to Philip Morris International (NYSE:PM) at current prices, for example; it’s simply too expensive for a tobacco stock. And Colgate-Palmolive (NYSE:CL) and Kimberly-Clark (NYSE:KMB) are not priced to generate market-beating returns in the year ahead. But most of the rest of the portfolio remains very attractive at current prices.

In particular, I am bullish on Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). As I’ve written in past issues, I believe that the “Wintel” combo is a steal at current prices. Microsoft is a high-margin business that absolutely gushes cash, some of which the company has used to boost its dividend. Investors worry that Microsoft’s best days are behind it and that its core market — the PC — is in terminal decline. I concede that Microsoft will never again see the dominance that it did in the late 1990s and 2000s and that the PC business is struggling to grow amidst the onslaught of trendy tablets like the iPad. But even as a no-growth business, I would consider Microsoft attractive at current prices. Its Windows and Office franchises alone would make it a buy. …

Intel’s story is a little more complex. Intel remains the most advanced chip company in the world, and its products are leaps and bounds ahead of the competition in raw power. But its chips also tend to hog a lot of energy, which has made it difficult for Intel to crack the smartphone and tablet market, where battery life is a real problem.

What’s worse is that Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) — the two dominant manufacturers today — make their own chips. So, Intel is not going to have an easy time gaining market share in mobile.

I’m OK with that. Intel trades for 9 times earnings and yields 4.5% in dividends. It also has no net debt and remarkably fat margins for a manufacturing company.

If Intel never gets a foothold in mobile and stays relegated to no-growth PCs and servers, it’s still an attractive business to own at current prices. And if maybe … just maybe … Intel manages to strike a deal with a major phone maker, then the sky is the limit.

If nothing else, the stock ought to trade for a valuation in line with the likes of Qualcomm (NASDAQ:QCOM, 18 times earnings) or Nvidia (NASDAQ:NVDA, 15 times earnings). Simply matching these two in valuation would mean a rise of 60%-100%.

Read more of Charles’ commentary on SizemoreLetter.com, and sign up for his free stock commentary via email here.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in INTC.

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