How DRIPs Can Skyrocket Portfolio Growth

Have you heard of DRIPs?

Short for Dividend Reinvestment Plans, they’re also sometimes referred to as a “Secret Wealth Club” for the rich.

By buying stocks that pay regular dividends, you can ensure that you have a steady cash flow no matter what the stock market does as a whole.

However, the wealthy take this strategy one step further and reinvest their dividend payouts by using them to buy more stock. Most of the time, you can purchase additional shares using dividend payments commission-free. And sometimes, you’ll even get a discount off of the market price.

Sounds like a win-win, right?

Another advantage of reinvesting dividends is the option to buy fractional shares. This means that even if your dividend payout doesn’t result in a sum that buys an even number of shares, you can buy a portion of a share. Even though it might not equal a total, whole share, you can still collect a percentage of dividends from the fractional shares.

Typically, you can’t buy fractional shares on the open market, but with a dividend reinvestment plan, you’ll be able to more often than not.

Compound Interest, for the Win

But, that’s not even the best part. There’s also the magic of compound interest to consider. Albert Einstein has been credited with the following quote:

“Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.”

You’re probably already intimately familiar with the concept of compound interest, but let’s take a look at a real-world example.

Let’s say you’ve got $10,000 invested in two different accounts. Each account has an identical investment portfolio yielding 6% interest. In the case of one account, you pocket the $600 each year. In the case of the other account, you reinvest it to buy more shares, allowing the principle of compound interest to take effect.

Fast forward 30 years and the first account still has a balance of $10,000. You’ve also managed to collect an additional $18,000 from the annual returns, bringing the total value to $28,000.

However, if those dividends had been reinvested (as was the case in the second account), the total balance of the account after 30 years would be $57,435. Just by reinvesting dividends instead of cashing out, you can more than double the value of a portfolio, even with modest returns!

Stocks with the Highest Dividend Yields

In addition to getting dividend payments, you can also grow your wealth as the stock prices appreciate. But, even if the price of the stock goes down, you can still make money.

Here’s a list of stocks that have a reputation for paying the highest dividends as of January 15^th, 2020. Note: these are the dividend amounts paid per period, not annually, which makes them even more enticing!

When to Avoid Dividend Reinvestment Plans

There are times when you might want to avoid reinvesting dividends. Here are a couple of scenarios:

1. 1. You’re near retirement, and you need the dividend income now. In an ideal world, you’ll have plenty of funds from other sources to live on, but if you are short on cash, you might be better off to take the dividend payments now instead of reinvesting them.
2. The company is not doing well. If the underlying asset is underperforming, and you don’t think the stock is going to increase in value anytime soon, you might want to take your money and run. This includes both taking the dividend payment and potentially selling the stock.
3. You need to diversify your portfolio. If your portfolio looks a bit lopsided, you might want to take the dividend payments and investment them elsewhere instead of buying more of the same.

The Bottom Line: Many of these companies are household names, so you might already have them in your portfolio. If you’re not reinvesting your dividends, consider doing so to accelerate the growth rate of your investments. Unless you need the money this instant, DRIPs are almost always a smart move.