A Dividend Reinvestment Plan or DRIP is a tool investors can use to reinvest their dividend payments by purchasing additional shares of the stock. Most online stock brokers offer these plans to their clients as an opportunity to increase the value of an investment. Generally these investments are commission free and can be at a discount to the current share price of the stock, which is a good incentive for investors to signup.
Investors who buy stocks through direct stock purchase plans (DSPP) may also have the opportunity to reinvest their dividends. Depending on the company, these trades are usually commission free as well, which can help the small investor (like myself) save on costs. For example, I have setup my Clorox DSPP and Cincinnati Financial DSPP investments to automatically reinvest all dividends back into more shares of stock. This will allow me to compound my earnings and grow my income portfolio faster.
The other significant benefit of electing to DRIP your dividends is that most plans will purchase fractional shares, which helps smaller investors. For example, let’s assume you received a quarterly dividend payment of $25 from a stock you own. If it is currently trading at $50 per share, you would not have enough income to reinvest in a whole share of stock. If your broker allows it, a DRIP will reinvest the money back into a fractional share (or .5 in this case). As I am a small time investor right now, I take advantage of the fractional share reinvestment for all stocks I own in my portfolio.
There are plenty of advantages to opting for a dividend reinvestment plan for stocks you may own. Just be sure that you fully understand how they work and do your due diligence before signing up with your broker or DSPP.
Do you DRIP your stocks to compound your dividend income?