DRIP Investing Benefits

One of the best ways to build an ever growing income stream from your stock investment is with a DRIP. Simply stated a DRIP is a Dividend Reinvestment Plan whereby dividend distributions from your stock holdings are reinvested to purchase additional shares. By taking advantage of this type of investment vehicle you gain numerous advantages over the long term by allowing time to compound your investment. Let’s take a closer look at DRIPs and some of their inherent advantages.

 

 

Fee Free

One of the greatest advantages a DRIP features, is the ability to purchase additional stock fee free. Typically, when you buy stock from any of the popular brokerage houses a commission is charged per transaction. When you receive a dividend distribution that is enrolled in a DRIP the cash received is automatically reinvested and additional shares are added to your account for free. We all know that even small fees can add up to a lot over a long term investment and anytime you can add additional shares to your account at no cost should be taken advantage of.

 

Portfolio Growth

DRIPs have the ability to provide you with tremendous compounding returns over time. Essentially, a one time purchase can grow to be quite large over time as DRIPs enter you into a never ending growth cycle whereby dividends automatically purchase additional shares which in turn provide an even greater number of shares at the next dividend distribution date. For example, if you had $2,000 invested in Pepsi in 1980, that would be worth more than $150,000 by the end of 2004. You would have started with 80 shares, but by reinvesting dividends, you’d now have 2,800 shares (source: Dividend.com).

 

Automated Investment

Another great benefit of reinvesting dividends is the ability to automate purchases. This ‘set it and forget it’ approach essentially takes the ‘financial noise’ out of the equation when trying to decide whether or not you should make a stock purchase. Too often we are bombarded with scary headlines about the stock market and the direction it is headed in. These “news” sources might convince you, at times, to not invest or reinvest your dividend distributions. By enrolling in a DRIP, the thought process is essentially removed from the equation as every dividend received is automatically used to purchase additional shares. By having this autopilot approach you are afforded the luxury of putting your dividend distribution to work immediately which, as mentioned above, simply affords you portfolio faster growth.

 

Flexibility

These days DRIPs are very flexible in nature. You have the choice of determining full or partial enrollment with each investment you make. Say, for instance, you’d like to grow your portfolio by adding additional shares but also are looking for some dividend spending cash with each distribution. Solution: Enroll in a partial DRIP whereby a portion of your dividends purchase additional shares while the rest are given to you as cash. It is fully up to you to decide. Some stock brokerages even allow a flexible DRIP whereby dividends received in one company can purchase shares in another. Typically, DRIPs can only be reinvested into shares of the company that paid them. Scottrade, for example offers this flexible DRIP program whereby dividend distributions of, say Coca Cola, can be used to purchase shares in Pepsi. This is a great way to add diversity within your dividend income portfolio.

 

Discounts

Another great advantage of enrolling in a DRIP is the ability to receive discounts from the companies that are sending you the distributions. Many companies offer 5% or even 10% discounts on your share price if you choose to reinvest your distribution back into the company that paid them. Just think about all these money saving advantages DRIPs offer. You save money on purchase fees and you may also be offered a share price discount.

 

Dollar Cost Average

Finally, DRIPs also give you the benefit of dollar cost averaging your purchase price without adding any new money of your own. If you bought a stock that happened to lose value after your purchase date your next dividend distribution will automatically buy new shares at a lower price thus lowering your average cost of the position.

 

One final note to be aware of when looking at different DRIP programs that exist is the ability to purchase whole or fractional shares. Most regular DRIP programs allow for the purchase of fractional shares which simply means that even the smallest dividend distributions can be reinvested even if the dividend received is not enough to buy one whole share. In this manner you are able to buy half, quarter or even tenths of a share of stock allowing your compounding machine to work with any dividend amount.

 

Other DRIP programs that exist are known as synthetic DRIPs whereby only whole shares can be purchased at a time. The disadvantage of these types of DRIPs is the fact that more money is needed up front in order to make sure your dividends received are enough to buy at least one whole share otherwise your dividend will be distributed as cash.

 

In collaboration with Karen @ Makin The Bacon

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

24 thoughts on “DRIP Investing Benefits

  1. Good post DivHut. DRIPs are truly one of the greatest values on the planet. For someone who is into investing for dividend returns, or long term investing, they are the obvious choice. It’s unfortunate to see them passed up by so many folks. If you are comfortable with spending xxx amount to invest in the company initially, you should definitely feel comfortable with FREE shares of it in the future!
    Bloodstone recently posted…The Plan: Phase OneMy Profile

    • Hi Bloodstone,

      You know the saying, “there’s no such thing as a free lunch,” but sometimes there really is. DRIPs offer a truly powerful method of compounding investment returns that everyone, especially dividend growth investors, should take advantage of. Happy you enjoyed this latest post. Thank you for commenting.

    • Hi GI,

      My sentiments exactly. I think many people are still lost on the true power of compounding and what it can do to a portfolio over the long term. Reinvesting dividends while in the accumulation phase of your portfolio should be mandatory. Thanks for stopping by and commenting.

  2. Started automatic DRIPs for all accounts earlier this year. Have increased my annual dividends by 2% in six months. It is interesting that different brokerages have different implementation, though. For instance, my 401k issues shares to 1 ten thousandth of a share, but charges additional commission to liquidate fractional shares above and beyond the normal commission, and you have to sign up each stock individually. The brokerage that handles my wife and my Roth IRAs, however, only issues shares to the thousandth of a share, but fractional shares are liquidated free of additional commission charges, and the entire account is signed up to DRIP or not; you cannot sign up individual stocks per se. (That said, using DRIPs if you expect to sell is not really effective. I sold some stocks that were signed up for DRIPs while reallocating funds.)

    • Hi KeithX,

      You account of DRIPs is an excellent real world example of how compounding can grow your overall portfolio balance. To think in just six months your annual dividends increased by as much as 2%. This just highlights what compounding can do for any dividend growth portfolio. The overall point of DRIPs is really to hold and grow a position over a long period of time. This is where a DRIP is most effective. As you mentioned, selling a position in a DRIP may not always be the most efficient thing to do but I guess that’s the nature of this type of investment vehicle; to essentially buy and grow instead of buy and sell. Thanks for sharing you DRIP experience and commenting.

    • Hi Seraph,

      I think Scottrade is the only brokerage that has this flexible dividend reinvestment feature. Even though they only allow for the purchase of whole shares, you have to admit it’s pretty cool to be able to buy shares in other companies from dividends received. Thanks for commenting.

    • Hi youngdiv,

      Sharebuilder does not offer any discount for shares purchased via dividend reinvestment. From my understanding in order to get a discount on share price for reinvestment you have to be enrolled in a DRIP program directly from the company and the company has to offer the discount as well. Here is a site that explains in great detail the nature of DRIPs and how to enroll in specific DRIPs for the companies that offer them http://www.directinvesting.com Thanks for stopping by and asking your question.

  3. DH and Karen,

    Nice read. I typically DRIP directly back into shares of the companies that pay the dividends. However, my discount brokerage only has a Synthetic DRIP. I don’t mind it so much because it does allow some cash to build up for purchase of other companies.

    I love the PEP example you provide above. One of my favourite exercises is going to company websites and taking a look at what the reinvested dividends would amount to over the decades. My brother, Rick, is having a son in January and my plan (since everyone else will be buying him more toys than he’ll ever be able to use) is to buy the little one (no name yet) shares of various companies and enroll them with ComputerShare. Then I’ll be able to simply write cheques for holidays/birthdays and mail them in to pick up more shares which DRIP passively and hopefully build him a nice little portfolio that he’ll appreciate when he’s off on his way in life.

    Thanks for sharing!
    – Ryan from GRB
    Get Rich Brothers recently posted…Modern Day SlaveryMy Profile

    • Hi GRB,

      There are so many examples of these money machines that “had you invested twenty or thirty years ago” would be paying more in dividends today than the original investment. MO is another stellar example showing the power of time and compounding on an investment.

      I like very much your idea of gifting stock to a new born. We talk about time and compounding a lot with regards to dividend investing and, in general, babies are the ones with the most time to go. While, I’m sure this gift won’t be appreciated at first by any child, once that kid turns 18 or more and sees what money producing machine has grown from your initial gift, he’ll truly understand the power of compounding. After all, sometimes the best investments are the ones you don’t touch for a long, long time. Out of sight, out of mind. Thank you for sharing you plans.

    • Hi Tawcan,

      There are so many benefits to a DRIP that you have to wonder why there are still so many people that do not invest in this manner. I think it is an education thing in that most people aren’t aware that such programs even exist. As you said, it’s a great way to take advantage of dollar cost averaging as well. Thank you for your comment.

  4. DivHut,

    Great rundown of the benefits of a DRIP. Nice and easy and allows you to kind of run the portfolio on autopilot.

    I personally selectively reinvest dividend income for a number of reasons, including valuation considerations, but I can certainly see why someone would prefer a DRIP.

    Although, some of these benefits aren’t DRIP-specific. For instance, portfolio growth via compounding is irrespective of whether or not you reinvest dividends automatically back into the security that paid them.

    Thanks for sharing!

    Best wishes.
    Dividend Mantra recently posted…My Watch List For November 2014My Profile

    • Hi DM,

      There’s no question that one of the main benefits of a DRIP is the ‘set it and forget it’ feature. Anytime you can automate your investments and let them compound over time you’ll surely walk out ahead. The fee free nature of DRIPs along with share price discounts for many stocks can really give incentive to a person to invest in a particular stock. In general, we are all utilizing some DRIP features whether we use Scottrade’s FRIP, or Sharebuilder’s dividend reinvestment or actually enroll in a company specific DRIP directly through Computershare or DirectInvesting. The bottom line is that this method of investing is a great way to build wealth over time. Thank you for sharing your thoughts.

  5. Hi divhut

    DRIP is a good strategy in the market like the US where retail investors can purchase 1 share min. In some asian market, this translates into odd lots having some difficulty into selling them so the take up is generally not that favorable to the investor 🙂

    • Hi B,

      In general, at least in the U.S., DRIPs make a lot of sense for long term dividend investors. The benefits far outweigh any costs associated with this type of investment vehicle. While selling odd lots may not always be a viable option, as you mention in some Asian markets, it still is a great way to invest for the long haul. I guess before any planned sale you have to make sure your holdings aren’t in odd lots if you happen to be invested in those types of maerkets. But as I mentioned before, you enter DRIPs for the long haul which may mean holding positions for years if not decades. Thanks for stopping by and commenting.

  6. DivHut,

    Great article! As you know, us diplomats are DRIP investors and have been for years – it takes so much thinking, time and transaction out of the process, loving it. What you may have also forgot to mention is those 80 shares of Pepsi giving you $0.08/year in 1980 or $6.40/year turned into 2,800 shares paying out $7,336/year aka – an astronomical increase from then to now. It’s amazing! Great article, talk soon.

    -Lanny
    Dividend Diplomats recently posted…2015 Year Goals – Geared up!My Profile

    • Hi DD,

      Glad you enjoyed this article. While many of us (DGI bloggers) know the merits of DRIPs I wanted to share this knowledge with many of the new/first time dividend investors who stop by. Your comment echoes one of the main reasons I like to reinvest dividends automatically, as you said, “it takes so much thinking, time and transaction out of the process.” Having the ability to add shares at no charge and not have to think about it is a great benefit to this type of investing. Thanks for further highlighting the Pepsi example and provide real world dollars and cents to the example as well.

  7. Nice article, I use Scottstrade and just recently enrolled in the FRIP plan this year. I like the flexibility and commission free. I have not purchase any stock yet with the FRIP, as I am still accumulating more money. I do have some dividend stock have drop recently and I might make a purchase soon.
    J @ the expat investor recently posted…October 2014 monthly net worthMy Profile

    • Hi J,

      I have heard many good things about the FRIP program from Scottrade. I think it’s a great idea to be able to purchase any stock you want with the dividends received instead of simply reinvesting into the company that paid them. Like you, I too have some dividend stocks that are below my purchase cost and I will most likely be adding to those positions before considering anything new. Thanks for stopping by.

  8. DivHut,

    Nice post and overview of the benefits of DRIPs. I have just about every position in every one of my accounts on DRIP plans. While it could be tempting to take the cash and run or selectively reinvest in other investments, it is much easier to be in a plan that reinvests automatically. It is also fun at least for me to see the new shares and monies hit the account. Then being able to calculate the the next payment and growth of income.

    Then to top it all off dividend raises. I’d say that’s for me!
    Dividend SWAN recently posted…October 2014 Dividend UpdateMy Profile

    • Hi SWAN,

      The autopilot ‘set it and forget it’ approach is always best. Sometimes when you don’t fiddle with investments you are better off. I too automatically reinvest all dividends from every stock I have. The less thinking I have to do about my portfolio the better. Thanks for sharing your thoughts.

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