Getting Every Last DRIP Out of Your Dividends: Dividend Reinvesting

You may have heard of the term DRIP (Dividend Reinvestment Plan), but why would you rollover your cash into more stock when it could've been in your pocket? The answer is quite simple, but a DRIP may not be the best move for your specific portfolio... Let's dive in.

What Is It?

A dividend reinvestment plan takes the payout you would normally receive to your buying power, and purchases the equivalent to the current price per share of the security you are receiving the dividend from automatically. For example: you purchase 100 shares of a company at $30 each for a total investment of $3,000. Over the next year, the company pays out $2 per share in annual dividends, so you receive $200 in dividends. Instead of taking the cash, you use a DRIP, and that $200 is automatically used to buy more shares. If the stock price remains at $30, your $200 dividend buys you about 6.67 additional shares. Following on top of this, you will receive dividends on the additional 6.67 shares.

Should I Use DRIP?

DRIP is perfect for a stock you are confident will rally up and you want to squeeze more returns, or an ETF you want to compound for decades. This super easy setting to change on your brokerage account can shave years off of your financial goals. In addition, it requires no extra buying power, is automatic, and DCA's the stock if needed (shameless plug for last week's article!).

DRIP may not be for your portfolio however. If you are an active trader and find yourself needing more capital for good buy opportunities, DRIP could shorten your liquidity and potential returns if that cash gets invested and appreciates faster then the original stock. My advice is to set up DRIP on the stocks you aren't going to touch for a long time (3+ years), or stocks that you are "bag holding" in and want to DCA. Otherwise, take the cash from dividends and set it aside for trades you know will be more short term.

A Final Thought...

Maximizing compound interest is made easy now thanks to DRIP. But the fruit of this labor will only be seen by patient long-term dividend investors who know wealth isn't built over night.