One of the ways that you can develop an investing income stream is to make use of dividend paying stocks. Because companies are paying out a portion of their profits in dividends, it is a great deal like receiving “free” money. It is money that you receive just for being a shareholder in a company that pays dividends, and the money is not connected to you buying or selling stock.
However, in some cases you may not be interested in receiving the dividend payment immediately. If you are more interested in the long term implications of your dividend investments, you can actually reinvest that money. One of the best ways to do that is through Dividend Re-Investment Plans, or DRIPs.
Investing in DRIPs
With a dividend reinvestment plan, your dividends are paid by the company as normal, but instead of being paid directly to you, they are reinvested in the company’s stock. So you get to buy another few shares (or a partial share) of stock, without spending your own money. The additional shares start to add up, and if the stock does well, you get the benefit of having those extra shares when the time comes to sell. It’s a great way to add to you retirement nest egg, especially since it is possible to include investments that offer DRIPs in a tax advantaged retirement account (IRA, 401k, etc.).
Many companies offer DRIPs, and do not charge extra transaction fees when shares are bought with dividends. Many traditional brokers and some online brokers are also helping out by waiving transaction fees on dividend reinvestments. However, it is important to note that not all brokers do this, so you want to check the terms of your agreement in order to make sure you won’t be hit with transaction fees when you reinvest dividends.
For a long term plan, this can be a good way to help you build wealth. In some cases, you are likely to earn more in the long run by getting more shares and then selling them after they have appreciated in value. DRIPs can be a good way for money to do a little more work for you. But you do have to be careful. If you choose to invest in a company that does not do well over the long run, having more shares thanks to a DRIP is not going to help you much. When using DRIPs as a long term investment, it is usually a good idea to choose a company that is fundamentally sound, and likely to see reliable growth over time.
Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.