Having money sitting around is not a very good thing–thanks to print-happy central banks, money leaks value with each passing day thanks to inflation. You may be thinking to yourself, “don’t worry, I read your 5 Dividend-Paying Stocks to Consider in 2019 article–my money is making me money.” for which I congratulate you. But what happens when those dividends sit there collecting dust without being able to be reinvested? That’s where DRIP comes in.
DRIP stands for “dividend re-investment plan”. This is a feature that some brokers offer, and leveraging it is crucial to growing your wealth. Let’s say you have 1 share of Stock ABC that you bought for $10. Stock ABC pays you a dividend of $1, which is not enough to buy another share. In this scenario, you have to wait for 10 dividend payouts to have enough cash to buy another share of ABC. DRIP solves this by combining re-investment with something called fractional shares.
Fractional shares as the name says, are simply fractions of a share. In other words, anything less than 1 whole share. Let’s look at the previous example, but this time using DRIP and fractional shares: The same $1 dividend on your $10 share of ABC could be re-invested using DRIP to buy 1/10th of a share. You’d now end up with 1.1 shares of ABC, and whereas before you had cash sitting around doing nothing, you now are putting that extra $1 to work, because next time dividends are paid out, you’ll be getting paid for 1.1 shares instead of 1.
Generally speaking, DRIP is a fire-and-forget mechanism some brokers offer. That means you can turn it on, and they will do the rest–every time a dividend is paid out, it will be converted into shares (sometimes fractional) of the stock that paid the dividend.
DRIP is certainly not the only thing to look for when choosing a broker, but if your strategy involves dividends, there’s a strong case to be made for picking a broker that offers it. Good luck and happy investing!
