Dividends are an important factor in making any investment decision. They have a significant impact on the overall return of a particular investment.
While in the short term it may not seem like you could gain much from reinvesting small amounts of dividends, over the long-term you could be missing out on significant gains from the effect of compounding interest. One of the easiest ways to maximize investments in dividend stocks is through dividend reinvestment plans, or DRIP for short. There are many advantages of dividend reinvestment plans that investors can use to purchase stock.
What Is A Dividend Reinvestment Plan
Dividend reinvestment plans have been offered by many companies for quite a long time, but they are becoming ever more popular with investors. Offered directly by the underlying company, a DRIP is essentially a method by which shareholders do not receive dividends in cash but rather in additional shares of stock.
Advantages Of Dividend Reinvestment Plans
The advantage ofdividend reinvestment plans and plowing your dividends back into your investment is that it has a significant effect on your investment returns over time. This can be found in the impact that compounding has.
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By buying additional shares in the same company you gradually increase your holding, but you also receive ever increasing dividends as your total holding not just your initial investment increase over time. In many markets and industries, this could result in returns that are more than 50% higher than if you did not opt for reinvestment throughdividend reinvestment plans.
Buy Shares Direct From The Company
Companies that offer dividend reinvestment plans generally handle the process directly, and you usually only need to fill out the relevant forms to partake in the plans. When each dividend payment date comes around, your broker is not sent a cash amount but is rather notified about additional shares that have been allocated to you. Your total share holdings continue to increase through DRIPs.
With every dividend payment, you increase your holding in the company automatically. And, the more successful a company becomes, the greater your investment grows, which helps boost your overall investment returns.
DRIPs Often Offer Investors A Discount
One of the biggest advantages of dividend reinvestment plans is that many companies often offer a discount on the official share price. This gives you an immediate leg up and a positive value of your new shares of stock. While the discounts are usually quite small, this all helps in the long-term. In addition to the discount, signing up for such a reinvestment plan greatly reduces your stock purchase costs since you are skipping the stock broker or your discount brokerage firm.
For example, if you bought $100 worth of shares and paid $7 commissions to buy and sell, then the shares would have to increase by 14% just to for you to break even. This is where DRIPs become especially beneficial for small scale investors who receive only small amounts of dividends. There are no commissions and typically only very small fees involved.
Dividend reinvestment plans are by far a great way for investors to ensure that their portfolios are performing to the highest level possible while saving the investor money in commissions. By reducing costs and taking advantage of compound interest, every investor should take advantage of dividend reinvestment plans.
I buy shares of companies directly from them using websites like Computershare. It’s a great resource to get into purchasing DRIPs, and the company acts as the central agent for most of the companies on the S&P 500.
Do you invest in DRIPs? What’s your favorite companies to invest in using dividend reinvestment plans?