Help! My dividend stock just violently dropped in value!

I own shares of Cisco and today (November 11, 2010) they dropped in value by over 16% - and I actually am a little excited!! Why? Because I expect Cisco to be a dividend paying dynamo in the years ahead.  And with a lower valuation my returns on this stock may grow more quickly.

I am a dividend investor. I believe that dividend stocks are the safest and most reliable way invest in the stock market. I also believe that, over time, dividend income investing can be one of the most lucrative ways to make money in the stock market. It takes a long term view to invest this way.

For nearly all of my dividend paying stocks, I have DRIP set up. DRIP stands for Dividend Reinvesting Plan. DRIP is when the dividend I receive goes right back into purchasing more shares of stock rather then a mere cash payout.

So why would I be excited that Cisco dropped in value today? I am excited because when Cisco starts paying a dividend next year that means my dividends will be able to purchase more shares of stock then before the price drop. And over time those additional shares will also pay dividends. And, should the value of the stock stay low, I will accumulate shares more quickly.

This is great on its own - more stocks paying me a dividend every month! But I also anticipate in the case of Cisco those stocks to pay more to me by way of dividends ever year. Cisco is sitting on loads of cash and that cash balance continues to go up year after year - improving the chance that my dividend will increase in its payout.

Low valuations relative to earnings and increasing payouts create a compounding machine!  That is why, as crazy as it sounds, I am not afraid of a 16% one day price drop!

Let me show you how this has worked in the past.

First, look at Altria/Phillip Morris. If you had invested in this stock back in 1970, your return in spite of a low valuation would be a hefty 6,600%. But if you had reinvested the dividends you would have a return of 155,000%!  Wow!  Who would not take that?!?

Second, take Johnson and Johnson. Had you invested $2,000 in Johnson & Johnson in 1980, that would be worth $151,482 today. Your initial investment would have been for 13 shares. But due to growth, reinvestment of dividneds, and stock splits you would own own almost 2400 shares of stock! And these shares would increase the amount they pay you ever year!!!

And finally, if you were fortunate enough to invest $10,000 in Exxon back in 1980, you would be sitting on over $510,000 today when reinvesting the dividends!

Oh, and I should probably mention that you don't have to invest money and wait. You can add money to your compounding machine whenever you want. Invest your raise! Add your bonus! Buy more dividend paying stock with your modest inheritance! Do that early on, and those numbers will be dramatically higher.

I hope you have an urge to start investing in dividend paying stocks. If so, here are a few steps to take.

First, begin today! Compounding has more power the sooner you start. So get after it!

Second, watch those fees! Don't pay a full service brokerage to get this started. Go with a low cost brokerage like Sharebuilder of TD Ameritrade.

Thirdly, the tax situation on dividend reinvestment plans involves a fair amount of paper work. So consider doing DRIP investing within an IRA. The tax free or tax defered situation avoids you the tax calculation hassles. Plus, you won't be able to withdraw it early without paying a signifianct penaly - thus encouraging you to keep the compounding machine running at full speed.

And finally, consider starting with an ETF that invests exclusively in dividend paying stocks - and preferably in ones that have a history of increasing their payouts ever year.