Why Investors Love to DRIP:
Can I DRIP Stocks Too?
We’ve often found out that you don’t know you can do something until you ask. That’s exactly what happened to me this week when I discovered that my broker allows me to DRIP stocks. Until now, I didn’t realize my account had this feature, but I’m glad to know it does, and I’ll be taking full advantage of it.
For those who are not familiar, DRIP stands for dividend reinvestment plan. It’s a system where, instead of receiving your dividend payments in cash each quarter, you automatically buy more shares of the same dividend-paying stock. Here’s why this can be a huge benefit to you.
You might wonder, what’s the big deal? Why should you reinvest your dividends instead of cashing them out? The ability to DRIP stocks is a major perk of dividend investing. Let’s look at the advantages:
If you’re still unsure about the impact this can have on your portfolio, check out this graph from Dividend Growth Investor. They compared the returns of the S&P 500 Index with and without reinvesting dividends. The one reinvesting dividends did far better.
Over time, the reinvestment doubled the size of the investor’s portfolio. You can find numerous other examples online.
After publishing a few reports on dividend-paying stocks on My Money Design, many readers asked why I didn’t have a DRIP setup for the dividend payments. Honestly, I didn’t think I could.
A few years ago, I read “The Little Book of Big Dividends” by Charles B. Carlson and first learned about DRIPs. I mistakenly thought that a DRIP was something you had to set up directly with the company issuing the stock. For instance, to DRIP Johnson and Johnson (JNJ) shares, I believed I had to register directly with JNJ. This method would be fine for a single stock, but managing it for multiple stocks would be a hassle.
Then, I saw comments mentioning that some brokerage accounts offer this service automatically for all stocks. This sounded much more efficient. But I had never seen this advertised by my broker, Fidelity. So, do they offer this?
Curiosity got the best of me this week, and I called Fidelity to find out if they offered such a plan. It turns out they do!
After a five-minute call with a helpful Fidelity rep, he guided me to a hidden part of the account settings. A few clicks, and I was all set. I’m not sure why they don’t promote this feature more.
Now, I’m ready to go. Instead of letting dividends sit in my core cash account, I’ll use dollar-cost averaging to grow my portfolio more aggressively.
The only downside is that I need to keep track of the purchase price of each stock for tax purposes. Capital gains are calculated based on the difference between the sale price and the purchase price. Multiple purchases mean a bit more bookkeeping.
Overall, I’m pleased to add this strategy to my money plan since I don’t need the dividend income to live on right now. As I often say, why work harder when you can make your money work harder for you?
