When is a DRIP a Good Thing?

Dividend Reinvestment PlanDividend ReInvestment Plans or DRIPs can be a convenient and cheap way of compounding growth in your investment portfolio.  If you are not signed up in a DRIP, any dividend paying securities (i.e. stocks, mutual funds, REITs, etc.) that you own will deposit all dividend payments into the accounts those securities are attached or you will receive a check if there is no brokerage account.

A lot of people will use dividend paying securities to increase their income, especially during the retirement years, and is one of the better investment tools to do so.  If you are in that situation great, continue to do so, but realize that a DRIP is a possibility and you can opt in and out of the plan at any time.

Now if you are looking to grow your portfolio and don’t need any of the dividends payed to you, a DRIP might be one of the best tools available to increase your annual earnings over time.  Any reputable brokerage firm will offer DRIPs for all of the eligible securities that you own and they won’t charge any fees for the service.

When you sign up for a DRIP you can choose which individual securities to have in the plan.  Once you are signed up, any time a dividend is payed by a security in the DRIP, that dividend will be reinvested in additional shares of that particular security.  If there isn’t enough to buy a full share of the security, you will be credited as owning a fractional share.

The reason DRIPs are such a great tool is that, long term, reinvested dividends can significantly add to the value of your portfolio.  Dividends are paid per share, so you constantly increase the amount of the dividends you receive as more and more shares are purchased.  When you do this, over time you can take advantage of compounding — when dividend earnings generate their own earnings.  Even if only a few shares are owned and the dividend amount is small, reinvesting the dividends could help increase the value of the holdings over time.

Since most brokerage firms can charge $7 or more a transaction, taking advantage of a free way to purchase shares and grow your portfolio through DRIPs is almost a no-brainer.

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