The Power of Dividend Reinvestment Plans
Do you ever feel like you are being left behind? Like the people around us are steadily building their financial lives and we don’t even know where to start. You are about to learn something powerful so stick around to the end to find out the best reason for having a dividend reinvestment plan.
A dividend reinvestment plan, also called a DRIP, lets you
automatically reinvest the dividends of stock market assets you own.[1] Not all companies pay cash dividends, but many
do. Dividend payouts are usually every
three months. You can use these
quarterly payments to purchase more shares of the company’s stock.[2]
What are some of the benefits of DRIPS?
It’s Automatic
You set up dividend reinvestments and they quietly go to
work for you in the background with no additional work on your part. Each time a dividend is paid more shares will
be purchased for you. You don’t need to
save or budget for this, it just happens. You are helping yourself be more responsible, automatically.
Directed Saving
DRIPs can be an easy, passive way to save. Since you are not receiving the cash from
your dividends directly, you aren’t going to be tempted to spend it.
No Brokerage Fees
Most plans allow you to reinvest dividends with no brokerage
fees. This is a very cost-effective way
to add shares to your portfolio over time.
Most reinvestments are for a small or fractional number of shares. For these small trades in particular, not
having to pay brokerage fees can have a significant impact because they are one
of the key costs for investors that reduce returns.
Purchase Discount
Some DRIPs provide the ability
to purchase additional shares directly from the corporation.
You might be able to get a 1% to 10% discount below the market rate. And,
because there are no transaction costs, your cost basis is far cheaper than
what it would be if acquired outside a DRIP.
Dollar Cost Averaging
Stock prices go up and down.
Reinvesting your dividends when a stock goes down allows you to purchase
more shares than you would have otherwise with the same amount of money. And alternatively, you will purchase less
shares when the price goes up and may be too high.
Having a set strategy like steady dividend reinvestment
helps take the emotion out of the buying decision or trying to time the market.
As a bonus, you might have less volatility. Dividend stocks tend to be larger, more
established companies to begin with. The
added security of dividend payments may cause these stocks to not lose as much
value compared to other stocks when the market goes down.
Dividends May Increase Over Time
Companies can increase the amount of dividends they pay
out. Some have increased their dividends
each year for decades.
Compound Growth
Compound interest is without a doubt one of the most
compelling reasons to invest in DRIPs. Compound interest is interest earned on
previous principal and interest payments. Compounding may dramatically enhance
your wealth with little work over time, which is why it is sometimes referred
to as a miracle or magic. Even Albert
Einstein was reportedly enamored by the power of compound interest.
Each time you receive a dividend payment, it is based on all
the purchases and reinvested dividends you have in your account. This can work wonders over time and that is
if the dividend amount stays the same.
If the dividend amount goes up, this goes up for every share you own.
To wrap up, DRIPs are not for everyone and there are other factors to consider such as what taxes would be for your particular situation.[3] But for those looking for an easy, no fee way to harness the power of compound growth and focus on your long-term wealth, it’s hard to beat dividend reinvestment plans.
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them.
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