Did you know that in less than 10 seconds, you can make a change to your brokerage account that can add thousands to its value over time? It's as easy as okaying automatic dividend reinvestments.
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What is automatic dividend reinvestment?
If you own dividend-paying investments, the companies you're invested in pass some of their profits back to you when they make money. The question then becomes, "What do you want to do with the cash coming your way?"
You have options:
- Supplement your income
- Tuck it away in a savings account for future expenses
- Reinvest it in stock with the same company
It's not a one-size-fits-all proposition. What may be suitable for one investor is not necessarily best for you. For example, if you count on dividend checks to cover your everyday living expenses, keep those checks coming. However, if you can get by without that cash, automatic reinvestment is an excellent way to build your portfolio at a faster clip.
When you let your brokerage firm know you wish to reinvest your dividends, that money immediately goes toward buying more shares, or in some cases, fractional shares (a portion of a share). Many brokerages let you choose automatic dividend reinvestment through their online portals, which only takes a few seconds.
It's not just stocks. Most brokerage accounts allow for dividend reinvestment across the board, meaning you can reinvest in exchange-traded funds (ETFs) and mutual funds. In short, you could use this easy trick to fortify more than one type of investment.
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Dividend Reinvestment Plans
Dividend-paying companies sometimes offer DRIPs – an acronym for "dividend reinvestment plan." These plans take the guesswork out of the process by automatically reinvesting dividends on your behalf. Many are available directly through a dividend-paying company, are commission-free, and allow you to purchase fractional shares with the dividends paid on your account. The specifics differ, though, so it's essential to read the details carefully.
You can create your own DRIP through any brokerage firm by manually reinvesting dividends. That may mean letting your broker know what you want to do, signing a form instructing your broker to reinvest the funds, or toggling a switch online to reinvest automatically. You can opt out of reinvesting dividends at any time.
How it works
Imagine that you own 500 shares in a company that pays a $1 quarterly dividend. That's $500 you can accept in cash or reinvest. If you reinvest the dividend, the funds are used to purchase more shares. Let's say stock for this company is selling at $50 per share. By reinvesting, you now own 510 shares. The next time dividends are paid, you get $510, due to your increased shares of stock. Now, you have an extra $510 working for you to purchase more shares. It's a process that builds on itself, increasing the size of your portfolio.
How to get started
The easiest way to get the ball rolling is to visit your account online. Some accounts automatically ask you whether you want to reinvest dividends when you make a purchase. For existing accounts, you can probably enroll in automatic dividend reinvestment by going into your account settings. Once there, look for automatic enrollment options and follow the prompts.
If your brokerage account website is confusing, call and ask them to walk you through the online process or email you any forms you may need to get enrolled.
So many options
When it comes to investing, you may feel flooded with options. You must decide how much risk you're willing to take, how you want your investments allocated, and what you want to do with dividends. As you consider your options, remember that reinvested dividends are an effortless way to grow your investments.
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