To Use A DRIP Program, or Not To?

Automation is becoming the norm in our society. One can choose to subscribe to a certain product and have it shipped to their house every month or schedule a certain bill to be paid on the same day of every month. Basically, having systems in place to help us with our day to day activities is quickly becoming the new normal in our lives. I personally love the use of auto pay and not having to think about ever missing an important bill. Not everyone feels that way though and still prefer to do things the good old fashioned way.  


DRIP Basics

So what exactly is a DRIP program?  A drip program is designed to be another autonomous program for people that would like to spend less time with dividend investing. This is a super great idea for the casual investor that would just like to choose a few companies to invest their money into, and then sit back and relax while the dividends roll right back into the shares they own of a particular company.  

it's super easy to set up a DRIP program as long as the company you are choosing to invest in offers the program. (which most do.)  

Their are two options to setting up a DRIP account. the first and most old school way is to call the company and ask if the company offers a drip program. they will need to collect basic information from you to set up the program.  

The second option is to set one up directly from the broker or trading platform you invest from. This is the best option personally since you will be able to log on and monitor your funds at anytime you choose. all one has to do is find the company they wish to invest in, call their broker and speak to a representative to set up the drip and then sit back and watch those dividends go to work.

Many brokers will allow the set up ad use of a DRIP program with zero commission and fees. The ones most people are familiar with are Scottrade, E*trade, Charles Schwab and Ameritrade to name a few.

Another benefit that is super important to know about DRIP programs is the ability to own partial shares of a company. This is a very special thing to take advantage of. The reason why this is such a big and important factor to remember is because of time, percentages and the affect these will have on the total potential amount of money one could end up with.  


For example if someone is actively using a DRIP program and they own 100 shares of Pepsi Co at $88.20 a share. when they receive their quarterly dividend payout, it will be reinvested into their current holdings. lets say they get .75 per every share they own. That is going to get the shareholder $75 in dividend income which will be used to purchase .85 of a share. The shareholder will not own 100.85 shares of Pepsi valued at 8,895 as opposed to their original value of $8,820. This is where the magic happens because those partial dividends will still accumulate interest and will also receive dividend payouts accordingly to the amount of shares owned.  This can really compound over time and add up to quite a bit of cash.

Conclusion

DRIP program are not for everyone though. I personally choose not to enroll into DRIP programs because i'm a very active investor and initiate at least one purchase per month. This is how I enroll my dividends into other purchases as I'm currently trying to broaden and diversify my portfolio a bit more every month.

To summarize, 

  • When you set up a DRIP, your dividends are automatically reinvested back into the stock.
  • The gain the true power of the DRIP, the shareholder must realize the power of compounding returns and realize that the fractions of shares will grow into a very large snowball over time!
  • The shareholder must make the purchase before the ex-dividend date to be eligible to receive the dividend reinvestment!

Hopefully this post will shed some light on an easier way to invest into dividends. I know it can be a lot for a new investor to get started. 

I will be making another purchase very soon! I'm waiting for the perfect opportunity to strike! I can't wait to update my Freedom Fund and new portfolio page next month also as it keeps me motivated and excited about where my portfolio has gotten in just seven months!

I'm always here if anyone has any questions or would like any advice! Feel free to send me an email or leave a comment!

Thanks for reading guys! I look forward to coming out with more articles that can help out new investors!