Take your dividend investing to the next level with help from DRIPs to build your wealth.
When it comes to growing my wealth, I'm a boring investor. I heavily favor index funds and ETFs, especially in my retirement portfolio (which is currently managed by Betterment). However, I've also been toying with the idea of long-term income investing.
I started dabbling with dividend stocks a few years ago. However, I didn't have much of a plan. I just bought a few dividend aristocrats?for the account I use for my emergency fund?and called it good. Even with this lack of planning, though, things are moving along at a good pace because all of the dividends I receive are automatically reinvested with the help of DRIPs.
What are DRIPs, and How Do They Build Your Wealth?
First of all, understand that dividends are payments made by companies. Some companies are willing to share profits with shareholders, and they make regular dividend payments, based on how many shares you own. The more shares you own, the more you receive in dividends. Dividend payments are on top of capital appreciation. You receive them at regular intervals (monthly, quarterly, semi-annually, or annually) and they are considered income. Some companies announce one-time dividends or pay special dividends. This can also benefit you, since any dividends you receive can be put to use as you build your wealth.
A DRIP is a Dividend ReInvestment Plan. Companies and funds (many index funds and ETFs?pay dividends) that offer DRIPs take the money that you earn through dividends and automatically reinvesting, taking it and buying additional shares. This is a way to essentially build your portfolio with free shares. As you build your portfolio, and prices rise,?your net work increases. DRIPs help this process along, since you automatically end up buying more shares over time.
In many cases, there are no transaction fees charged for DRIPs. Even when you set up your account through an online brokerage, many of them waive transaction fees when you sign up to automatically reinvest your dividends. As you automatically reinvest your dividends, you get more shares, and as you get more shares, you receive higher dividend payments the next time around, since payouts are based on the number of shares you own. It's a cycle that improves your ability to build your wealth over time.
Starting Slow and Steady
Of course, dividend payments are often relatively small, so it's not going to seem like a big deal at first — especially if you are just starting out as a dividend investor. I decided to up my dividend investing game recently when I joined Jeff Rose's Grow Your Dough Throwdown challenge. So far,?here is what my dividend income looks like from my $1,000 challenge portfolio:
I've received a little less than $10 in dividends since beginning this exercise. Unfortunately, Kapitall, the brokerage I'm using, doesn't offer to automatically reinvest my dividends. However, I've been letting my cash build up in the account so that I can buy more shares when I can. It's not the same as DRIPs, which manage everything automatically (and usually fee-free), but it's better than nothing.
The point of using DRIPs long-term to build your wealth is to help you boost your portfolio with a combination of dollar-cost averaging and dividend reinvestment. You should still add more money to your account each month (like I do automatically to my Roth IRA) so that you are building your portfolio in general. Add in the DRIPs, and you get a little boost each time a dividend is paid, so you add more shares in addition to your dollar-cost averaging efforts.
Over time, the cumulative effects result in a larger portfolio. Then, if you have built your portfolio up enough, your dividend payouts are actually large enough to have some real effect. With the right plan, after 10 to 15 years, there is a chance that your portfolio will be big enough that you can stop with the DRIPs and start using the income from your dividends as part of your overall income strategy.