Having the right information and a well thought through investment strategy are of the utmost importance, especially when trying to invest in our unstable and unpredictable economy. There are many different financial tools and vehicles for investment, but many wonder what the best, and most importantly safest, ones are. Dividend stocks are some of the best investments out there. The reinvesting of dividends is a long-term investment strategy that can turn a little, into a lot.
Dividends can be loosely defined as your share of profits made off your investment in a company through the purchasing of shares of stock. A dividend is your portion of the profit that the company you invested in earned over a quarter or other period of time and the company returned to shareholders. Many large companies offer DRIPS, or Dividend Reinvestment Plans. These plans are designed to simplify dividend reinvestment for small shareholders.
The Basics Behind DRIPS
These dividends are, for most small investors, rather small sums of money, but over time, when managed properly, this small amount of capital can turn into something much larger. A DRIP is an acronym for dividend reinvestment plans. These are plans that are generally fairly easy to enroll in, and many even offer automatic reinvestment of your dividends.
With a DRIP, you can reinvest the dividends that you earn back into the company that you own stock in, through the purchase of additional shares of stock in the company. Through this plan, you do not have to have the capital for an entire share; you can purchase partial shares as well. The more shares you own in a growing, stable company, the higher the rate of return your investment will yield. Small profits, continually reinvested, can really help the health of your financial portfolio and are a great long-term investment strategy.
The Perks of a Dividend Reinvestment Plan
This is an excellent way to manage your financial assets responsibly. You often get to purchase shares or partial shares directly from the company you are investing in, as opposed to having to go through a broker. This means that reinvesting in dividends will also save you on commission fees and other associated costs.
- Almost all DRIPs allow dividends to be reinvested for no fee
- You can purchase partial shares of a stock in a DRIP
- Over 100 DRIPs in the US allow investors to purchase shares at a discount to the current market price.
- DRIPs force a buy-and-hold strategy
A “full DRIP” is a dividend reinvestment plan whereby all your dividends are reinvested by purchasing stock in said company. This is a great way to handle your dividends if you do not need access to the liquid assets immediately. DRIPS are considered to be a good choice for a “buy and hold” long-term investment strategy, taking advantage of the ebbs and flows of the market by hanging on to shares, and obtaining more, while waiting for expected growth in a company.
A “partial DRIP” is a great choice for those who need, or wish to have access to some of their dividends in liquid, cash form. With a partial DRIP, a percentage of your dividends are reinvested into the company through additional share purchasing, and the rest is cut directly to the shareholder.
Types of DRIPS
Many companies take it upon themselves to run a DRIP. These companies run the DRIP right out of their headquarters, and you can purchase shares directly from them. Many offer this as an employee perk, and the same companies that run the DRIP directly are also usually the ones who offer discounts to the market price.
As management of DRIPs has become more costly over time, many companies have turned over the management to third-parties. Transfer agents are financial institutions that basically run DRIPs for a large number of companies.
Some brokerages offer dividend reinvestment at no-cost, even if the company doesn’t have a formal DRIP. However, most brokerages only allow the reinvestment of dividends, and don’t offer discounts or optional cash purchases at no cost.
Regardless of the type of DRIP you choose, reinvesting your dividends in a healthy, stable company with proven growth potential is a great long-term investment strategy to really get the most out of your investment dollars. The small sums that one receives on a quarterly basis from their investments generally doesn’t amount to very much cash at all, however, in the long-run, continually reinvesting these small amounts of capital can really pay off in the end.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.