One of the ways that many investors like to earn money from their portfolios is through dividend investing. Companies that pay dividends to their shareholders are often considered solid bets — especially dividend aristocrats. When companies pay dividends, they are returning some of their profits to shareholders. These dividend payouts are different from stock appreciation, so you receive them regularly, as part of the company’s desire to share profits around, rather than as the result selling your shares.
While receiving cash is nice, you can actually put your dividends to use with the help of dividend reinvestment plans, which are known as DRIPs.
These plans allow you to reinvest the dividends to buy more shares of the stock.
Reinvesting Your Dividends
Companies that offer DRIPs allow you to, instead of receive a check for your dividends, automatically use the money to buy more shares. If you own a stock that pays 20 cents a share each quarter, and you own 100 shares, that’s $20 each quarter. Without a DRIP, you get that $20, and you have to decide what to do with it. If you decide to invest it, though, you will likely have to pay a transaction fee.
If you are signed up for the company’s DRIP, that $20 buys more shares in the company automatically. If the stock price is $15 a share, instead of getting a check for $20, your dividend payout is used to automatically purchase another 1.33 shares of the company’s stock. Most of the time, shares bought with reinvested dividends don’t come with transaction fees. Even many online brokers won’t charge you fees for reinvesting dividends.
Over time, these extra shares can add up. As you acquire more shares, your dividend payout increases as well. DRIPs allow you to boost your payout.
In our example above, the next quarter you now have 101.33 shares to base the payout on, so that now you get $20.27, and you can purchase 1.35 more shares (if the price hasn’t changed from $15), bringing your total to 102.68 shares, with your reinvested dividends.
While it seems like a small difference now, the cumulative effects can be much bigger. You are constantly buying shares, which increases the amount of money you receive in dividend payouts. Plus, you are building your portfolio up with very little effort. Later, if you decide to sell some stock, you will have more shares that you can sell at a (hopefully) higher price. All the way around, DRIPs can help you maximize your dividend investing efforts.
How to Start DRIP Investing
Find out if the company of interest to you has a DRIP plan. Many dividend paying companies offer some sort of plan. You can contact the company directly for more information.
You will either be directed to an in-house representative who can set you up, or you will be directed to a transfer agent who handles multiple company DRIPs. You can also go directly to a transfer agent for a list of companies it manages DRIPs for. It is also possible to check with your broker to become involved in DRIP investing.