If you are a long-term investor looking to maximize the growth of your portfolio over time rather than getting income on money invested, then a dividend reinvestment plan (DRIP) is the right solution.
As the name suggests, the dividend reinvestment plan facilitates reinvestment of cash dividends. The reinvestment is done on the fractional/additional shares of underlying stocks. More than 1,000 companies now offer DRIPs. DRIP can be offered by mutual funds, ETFs, or directly from the companies.
With a DRIP, all of your dividends are automatically invested into additional shares of the same stock. When this is done consistently on every dividend, this can have a significant impact on the returns. Hence, investors can ultimately benefit from additional profits earned from the reinvestment of their dividends. Let’s understand more about this plan in detail.
101 Guide on Dividend Reinvestment Plan
For shareholders, a dividend is a reward that generally comes in the form of a cash payment that is paid via a direct deposit or by check. DRIP allows investors to reinvest the cash dividend in buying shares of the company’s stock equivalent to dividend value.
Let’s say that ABC Solutions paid a $10 dividend on a stock that traded at $200 per share. Investors within the DRIP plan would receive one-tenth of a share whenever there was a dividend payment.
How Does Dividend Reinvestment Plan Work?
The concept of DRIP is simple: when stocks you own pay you a dividend, those dividends are automatically reinvested into buying additional shares of the same stock.
In the case of DRIP, you are also liable to purchase the company’s share with minimum or no fee. Furthermore, you can also buy the share at discounted prices. The best part is that cash won’t be added to your brokerage account, and the company even pays you commissions and fees. However, the firm keeps detailed records of investors with share ownership percentages. The dividend reinvestments are generally completed within a few days of the company’s dividend payment date.
Pros of Dividend Reinvestment Plan
Here are the pros of buying dividend reinvestment plans.
- Minimum Investment
DRIP is a beneficial option for investors who wish to start with very little capital. Dividend Reinvestment Plan allows you to purchase stock directly from the company with low or no fees.
- Investing at your pace
DRIP requires a minimum investment to join the plan, and you have the privilege of investing at your own pace. In addition to reinvesting dividends frequently, these plans allow you to buy more with no additional cost. And consequently, you can regularly make additional investments when you have extra capital to invest.
- No Middleman Involved
If you purchase stock directly from the company that issues it, there’s no middleman (a broker who charges a commission to process every transaction). Unlike mutual funds, you also get to avoid the hefty management fees deducted from the fund’s assets.
- No emotions involved
When you buy a dividend reinvestment plan, you are dedicated to investing on a regular schedule. The market scenario has little to no impact on how you invest. You just have to acquire shares without any hassle, thereby resulting in building your wealth slowly.
- Leverage the concept of dollar-cost averaging
When it comes to implementing a dollar-cost averaging strategy, a dividend reinvestment plan is perfect. In the case of DRIP, you’ll be investing a fixed amount or a sum of money regularly over time. You don’t even have to worry about the current market conditions or share price, because the plan automatically reinvests your dividends in purchasing shares regularly.
Cons of Dividend Reinvestment Plan
Along with its advantages, a dividend reinvestment plan comes with some cons too. As an investor, you should consider the cons before deciding to adopt a dividend reinvestment plan.
There’s no denying that a DRIP increases an investor’s exposure to the company. But, when the investor acquires more shares of the company through the DRIP, their portfolio will be more heavily exposed to it. And as a result, the dividend reinvestment plan may occasionally force the investor to rebalance his or her portfolio.
To avoid this, though, you can easily by investing in Mutual fund or ETFs as their portfolios are diversified and offering the same option of DRIP. Wealthface offers you a diversified portfolio of ETFs and pre-set proportions of equities, fixed income, real estate, and commodities that will be rebalanced every quarter by top-performing global ETFs with DRIP option available.
How to Enroll in a Dividend Reinvestment Plan?
So, you’ve made your mind go for the Dividend Reinvestment Plan? Searching for ways you can enroll in this investment scheme? Well, first of all, you should decide what investment product with DRIP you like the most. Either its ETFs or directly from the companies, you can use an online brokerage just like other investors. Or simply open an account with Wealthface and enrolling your ETFs in a DRIP. It can be done in a fraction of seconds!
Let’s take an example to understand: If you own four dividend-paying stocks or ETFs but don’t want to buy more than one, you can choose to receive the dividends from one and enroll the other three stocks/ETFs in the DRIP. This option is not available for now at Wealthface since the ETFs are already diversified. The dividend received from each ETF is already distributed in many stocks. So, it will make things complicated, therefore keep it simple. Wealthface invests on behalf of the client and makes sure to manage the client’s money by giving him the option to have the dividends reinvestment directly in his portfolio at no cost.
The best way of investing is to keep the diversification while your dividend that you received will be automatically reinvested in your portfolio.
Should You Choose a Dividend Reinvestment Plan?
There are manifold reasons to enroll your stocks in a DRIP, and there are also reasons to opt to receive your dividends as cash payments instead. So, you must carefully weigh the advantages and disadvantages before you enroll your stocks in a DRIP.
DRIP investing could be a smart choice for investors who are planning to keep their stocks for a long period and those who want to save on commissions and compound their investments. On the other hand, if you depend on your dividend stocks to fulfill your expenses or you are retired and want to invest money to get monthly income, then DRIP investing might not be ideal for you. If you are a long-term investor, then DRIP investing can be a great tool to maximize your dividends and grow your investment portfolio.