Saturday, August 3, 2013


Recently I had a conversation with a young co-worker who is interested in investing and we discussed different investment strategies to make money in the stock market.  One of the strategies we discussed was what I like to call "free stocks."

What do I classify as "free stocks"?  I consider a stock investment in which you have none of your initial investment tied up as a free stock, in other words you're playing with the houses money.  I like to use this strategy with dividend stocks to build monthly cash flow and total portfolio holdings.  

How does it work?  I've found that this strategy works best in a rising market, but you can use this strategy in any kind of market.  To get your free stock, you do your research, find a good company paying dividends with good prospects for price appreciation.  You decide on a dollar amount to invest in the company.  Once you've made your initial investment, you simply wait for the price to appreciate a significant amount and then you sell just enough shares to recoup your initial dollars invested.  

For example, you find a nice little insurance company selling at $10 per share with a 3% dividend yield.  You do your research, the company looks solid with good growth prospects and price appreciation, so you decide to invest $500.  Your $500 investment buys you 50 shares (not counting commissions, although you can include costs when selling to recoup your investment).  Over time others realize what a good company this is and the stock price appreciates say 30% to $13.33 per share.  Which makes your 50 shares worth a total of $666.50.  To get back your original $500, you would need to sell about 38 shares (38 x $13.33 = $506.54).  This leaves you with 12 shares paying a 3% dividend on your original purchase price of $10 and you no longer have any of your own money tied up in the stock, making it essentially free.

While this may not sound like much, repeat the process enough times and you've built a tremendous dividend portfolio.  You might be saying this sounds all well and good, but how do you find such investments.  I currently hold positions in 17 different stocks and mutual funds.  Out of the 17, I could use this strategy right now on 5 different investments.  I could pull all my money out and still own the stocks in my portfolio.  While I'm not planning on doing this at the present time, it does show the feasibility of this investment strategy.     

No comments: