How you can increase your returns by enrolling your stocks in DRIP investing.
Dividends
Companies that are publicly traded often times pay dividends which are a share of the profit that is paid out to the shareholders. Typically, on a recurring basis the company authorizes a payout to all shareholders on a particular date as a cash payment. If you own those shares in a brokerage account, your account will be credited with cash once the dividends are paid out.
You can leave that cash in the account but oftentimes that cash will earn next to no interest. You can wait until it accumulates and buy more shares in that stock or another. But there is another option that is automated and very appealing, and that is DRIP investing.
What is DRIP investing?
DRIP stands for “Dividend Re-Investment Program” which many companies offer and you can take advantage of with most brokerage accounts. Simply put, if you enroll in DRIP (typically you need to enroll for each stock that you purchase) when that cash dividend is paid out, instead of receiving the cash – the money will be used to buy more shares of the underlying stock. That allows you to get compounded growth by re-investing the dividend immediately. The really nice thing is that you don’t even need to have a lot invested to participate as you can purchase fractional shares. If, for example, your dividend payment comes out to be $20, but the share price is $40 at the time, you would be given 0.5 shares so that you can still take advantage of this compound growth.
Some disadvantages are that of course you don’t immediately have access to the money received as a dividend as it is re-invested (also note that you do need to pay taxes on those dividends received even if you don’t see the cash right away). When it comes time to sell, it also may take a slightly longer amount of time to receive the proceeds of the fractional share (typically one business day).
All-in-all, if you are a long-term investor in the stock and still are a believer that the underlying stock is a good investment, it makes a lot of sense to compound your earnings, and automate this part of your investment program by enrolling in DRIP. Another positive aspect of DRIP is that since the additional purchases are timed with each dividend payment, it serves to dollar cost average these investments.
