As more and more investing apps and other technologies come into the market, investors are increasingly focused on finding efficient ways to allocate their funds without requiring extensive research and portfolio management on their part. These apps are also adding investment friendly features like dividend reinvestment plans (DRIPs) to help you supercharge your portfolio. If you want to exponentially grow your investment income with minimal effort, then investing in dividend stockswith dividend reinvestment plans is a great choice.
However, it’s not as simple as finding companies that offer the highest dividend yields or simply dividend investing in dividend growth ETFs and hoping for the best. To develop an investment strategy that produces the highest gains possible, you can’t afford to overlook dividend reinvestment plans, also known as DRIPs. These are the true secrets to success in the stock market, but far too few investors take advantage of the incredible benefits they have to offer.
If you’re willing to wait for long-term results instead of seeking immediate gratification from the small, quarterly income you could receive from a regular dividend investment strategy, then here’s everything you should know about dividend reinvestment plans before adjusting your portfolio:
What Are DRIPs?
As the name implies, dividend reinvestment plans (DRIPs) automatically reinvest dividends into additional (or fractional) shares to add to your dividend portfolio. This way, you won’t receive quarterly checks in the mail (or deposits into your account) from companies you’ve invested in; instead, those dividend payouts will be rerouted back into your portfolio.
This is a highly effective type of dividend growth investing strategy, because your portfolio can grow exponentially over time (thanks to regular infusions of dividends through your DRIP). Some of the many advantages of DRIPs include: zero commissions on new stock purchases (it’s all automatically done for you, so no brokerage fee required), dollar-cost averaging, and the ability to purchase partial shares.
Perhaps the greatest benefit of dividend reinvestment plans is that they require minimal maintenance while maximizing your investment income.
You already know the stock is a worthwhile investment, so you don’t have to constantly research new companies and industries to invest in. Additionally, you won’t have to decide how to best spend your quarterly dividend payments – the DRIP will automatically reinvest those funds right back into stocks for maximum, long-term gains.
Dividend Reinvestment Plans Math Example
So how much money might you be missing out on if you aren’t redirecting dividends back into your dividend reinvestment plan? Let’s use the example of EPR Properties (EPR), which is a real estate trust that focuses on entertainment, recreation and education.
The trust went public in 1997, starting with a price of $19.50/share. If your initial investment was $10,000 then here’s what your portfolio might look like 21 years later:
- Dividends Collected (no DRIP):
- Portfolio Value in 2018: $62,530
- Average Annual Returns: 9.26%
- Total Return: 525%
- Dividend Reinvestment Plan (all dividends reinvested into new shares of EPR stock):
- Portfolio Value in 2018: $158,167
- Average Annual Returns: 14.27%
- Total Return: 1,481%
As you can see, simply having dividends circulate back into a dividend reinvestment plan significantly increases your average annual returns and total returns, in addition to producing more than double the gains you’d receive through a regular dividend investment strategy.
What About Taxes?
Dividends are taxed at the same rate, regardless of whether you reinvest or withdraw your funds from the brokerage account. The only difference is when you’ll pay capital gains taxes – when you ultimately sell off your shares. This means you won’t be risking higher tax bills by reinvesting your dividends into a DRIP (unless you’re in a significantly higher income bracket by the time you sell your shares and might have to pay a higher capital gains rate as a result).
Achieve Financial Independence Sooner
If you want to retire earlier and achieve true financial independence, then a dividend reinvestment plan is one of the best tools for accomplishing your goals. As you can see from the calculations example listed above, not reinvesting your dividends could present a massive opportunity cost over the course of several years.
Since DRIPs require little to no additional maintenance, there’s no reason to risk losing out on potential long-term gains for the sake of making a small, regular income from dividend payouts each payment period.
Dividend reinvestment plans have a lot of benefits. However, there is one notable dividend reinvestment plan disadvantage. With DRIPs, you are stuck reinvesting at the current market price. You could end up reinvesting your dividends at unfavorable prices (like when your dividend stock is expensive). But, that is one minor drawback compared to a heap of benefits.
It’s worth your time to contact your brokerage or learn more about automatically reinvesting your dividends into additional shares of stocks. This will help you maximize your investment income over the long run and help you become financially independent sooner than you could’ve imagined.
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