Drip, Drip, Splish Splash: How to Set Up A Dividend Reinvestment Plan
Have you ever wondered how some people manage to make their money work for them? They’re not all Wall Street hotshots with insider trading information. In fact, many of them are just like you and me. The difference is that they’ve learned how to make their money work for them through dividend reinvestment plans, or DRIPs.
A DRIP is an investment strategy where an investor reinvests cash dividends received from owning shares in a company back into buying additional shares. The result is compound growth as the reinvested dividends earn additional dividends down the road. Not only does this drastically increase the rate at which your investment will grow, but it also allows you to reinvest without incurring brokerage fees that would otherwise eat into your profits.
But how do investors go about setting up a DRIP in the first place?
What is a Dividend Reinvestment Plan (DRIP)?
A DRIP is an investment strategy in which cash dividends received from owning shares in a company are reinvested back into buying additional shares. This effectively allows investors to compound their growth by earning dividends on their reinvested dividends. Not only does this drastically increase the rate at which your investment will grow, but it also allows you to reinvest without incurring brokerage fees that would otherwise eat into your profits.
There are two main types of DRIPs: direct and synthetic. Direct DRIPs are offered by the companies themselves and allow shareholders to automatically reinvest their dividends back into additional shares. Synthetic DRIPs, on the other hand, are offered by brokerages and function similarly to direct DRIPs with the added benefit of allowing investors to reinvest in fractional shares.
How Does A DRIP Work?
A DRIP works by pooling together cash dividends and using those funds to purchase additional shares on behalf of shareholders. This process allows investors to compound their growth without incurring any transaction fees typically associated with buying and selling individual stocks.
To set up a DRIP, investors first need to hold shares in a company that offers direct participation in its plan—not all companies do. Once you’ve established that, you can contact the company directly or enroll through your brokerage firm if it offers synthetic DRIPPING capabilities. From there, it’s simply a matter of monitoring your account and making sure that your dividend payments are being properly reinvested according to your specifications!
Drip, drip, splish splash—investors can make their money work for them by setting up a dividend reinvestment plan! A DRIP allows shareholders to automatically reinvest their cash dividends back into purchasing additional shares, effectively compounding their growth over time. While not all companies offer direct participation in their plans, investors can still set up a synthetic DRIP through their brokerage firm if desired. So what are you waiting for? It’s time to start making your money work for YOU!
Xander is a writer for whatisdividend.com. He has been writing about personal finance and investing for over 10 years. His work has been featured in numerous publications, including The Wall Street Journal, Forbes, and Money Magazine. He is a Certified Financial Planner and holds a degree in financial planning from Boston University. In his spare time, he enjoys spending time with his wife and two young children.