What is Dividend Reinvestment?
When it comes to investing, there is no shortage of factors and terms to keep track of Dividend reinvestment is one such term.
You may have heard of dividend reinvestments through the acronym DRIP, which stands for dividend reinvestment plan.
A cash dividend is the money paid to a stockholder as part of that company’s profits or earnings.
Cash dividends are paid directly in cash, not in stock options or other assets.
With a dividend reinvestment plan, investors can reinvest their cash dividends into additional shares of the stock they are already invested in, on the date when their dividends will be paid out.
The term dividend reinvestment can also apply to any kind of automatic reinvestment program established by an investment company or brokerage firm.
But it typically refers to a specific type of program offered by publicly traded corporations to shareholders who already hold interests in the company.
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In this article we will take a look at the pros and cons of two different kinds of dividend reinvestment plans, why dividend reinvestment is important, and how to set up a dividend reinvestment plan.
What Are The Types of Dividend Reinvestment Plans?
There are two main types of dividend reinvestment plans, or DRIPs: brokerage account plans and company DRIPS. Let’s take a look at the pros and cons of both types.
Brokerage Account Plans
- With a brokerage account DRIP, you can invest in all different types of assets, including specific individual stocks, exchange-traded funds (ETFs), and mutual funds, among others.
- It is easy to keep track of multiple investments from the convenience of a single account. Your brokerage account will provide consolidated investment statements and all the information you need to keep track of the details of each company investment.
- Brokerage firms offer a wider variety of investment options, so you can more easily diversify your investment holdings. Instead of being limited to a single company’s individual stock, you can invest in a mutual fund, which invests in multiple companies for you, or choose dividend stocks.
- By investing through a broker you may be losing out on discount prices on your stocks. Sometimes investing directly with the company in a DRIP plan that reinvests in its specific company shares can help you save money.
- Most brokers don’t offer fractional shares, so you have to have the total amount to invest in an entire share, instead of building up towards it gradually.
With a company DRIP, you can buy stocks by reinvesting your dividends. Usually companies allow you to buy additional stocks at a fraction of the initial investment.
Not all companies offer DRIPs, so do your research beforehand.
- Since you can buy additional company stock on a fractional basis, you will be able to buy smaller parts of the stock with your dividend reinvestment. This means you will not have to wait until you have enough cash in hand to purchase a complete company share.
- Some company DRIPs will allow you to invest through your IRA dividends.
- Often company DRIPS allow you to reinvest your dividends with no commissions or fees.
- Sometimes companies offer their stocks at a discounted rate, below the market price. In fact, sometimes this discount price is available exclusively for your dividend reinvestment purchases, and not for other cash purchases.
- Company DRIPs allow you to invest in only one specific stock, so they will limit your ability to invest in other types of assets, such as mutual or exchange-traded funds.
- The price of company stocks is constantly fluctuating. With the automatic reinvestment of a company DRIP, your money may not be invested right away. Instead, the company may well follow its own timeline for investing your money, which means you may not be investing during the optimal stock prices.
- Some companies do charge enrollment and processing fees, which can at times cost even more than reinvesting your dividends through a brokerage account. You may also have to pay a fee to sell your shares.
- For some company DRIPS, you have to already be a shareholder before you can register additional shares in your name.
- If you are planning to manage multiple company DRIPs on your own, you may be facing extra paperwork and record-keeping, more than with a single brokerage account.
Why is Dividend Reinvestment Important?
Enrolling in a dividend reinvestment plan helps you benefit from compounding returns over time, and that means that your earnings will add up, helping you to reach your financial goals faster.
When your dividends are increased, you will receive a larger amount on each share that you own.
This larger amount can then be used to purchase a larger quantity of shares.
As this process repeats over time, your total return potential on the investment will increase as well.
Since you can always purchase more shares whenever the price of the stock decreases, there is more potential for long term gains.
How to Set Up a Dividend Reinvestment Plan
There are two primary ways to set up a dividend reinvestment plan.
The first option is to invest through a brokerage account.
Most stock brokers will allow you to reinvest your dividends instead of receiving cash payouts whenever your dividends are due.
The second option is to invest directly in the DRIP offered by the company you want to invest in.
For this option, you do not need to have a brokerage account.
One of the best ways to keep track of your earnings and to automatically reinvest is to use the Wealthface online investing platform.
Unlike a pricey brokerage account, you can store and monitor your dividends directly through this helpful platform.
Utilize in-app tools and resources to help determine the best investments and reinvestments to make over time, and continuously track your progress towards financial goals from wherever you are.
Dividend reinvestment is a smart strategy for boosting your overall long term returns.
Through either a company DRIP or a brokerage account, you will be able to take advantage of compounding returns over time, which mean larger profits in the long run.
Setting up a dividend plan is easy with either a company plan or a brokerage account.
Utilize the Wealthface investment platform to help track your financial progress and understand where you should invest for maximum returns.