One way that you can compound your earnings for the future is to investing in DRIPs. These are programs that help you increase your dividend earnings by reinvesting them automatically. If you are looking for a way to build a nest egg for the future, DRIPs can be a good option.
How DRIPs Work and Completely Explained
Dividend reinvestment plans (DRIPs) are fairly straightforward. When you invest in a dividend paying stock, you receive a regular dividend payment. This payment is above the earnings you get when the share price increases. A dividend payment is calculated according to the profits the company earns, as well as how many shares you own.
Normally, when you are paid dividends, you receive the money immediately. You can then do what you want with it, from spending it to saving it. DRIPs change things up a bit. If you sign up for a DRIP, your dividend, instead of being sent to you, is automatically reinvested in the stock, buying you extra shares. Essentially, a dividend reinvestment plan is a way to get additional shares of a fund or a stock for free.
So, if you end up receiving a dividend payment of $15, that money, instead of being sent to you, is used to buy more shares. If the price of the share is $30, then you would get 1/2 a share extra each dividend period. This means two extra shares each year if dividends are paid quarterly. When the share price goes up, it means that you own more shares than you would have had normally and that increases your earnings.
Compounding Your Earnings For The Long Term
Over the years, using DRIPs as part of your long-term savings can be a good way to compound your earnings. You can use dividend reinvestment plans for boosting your retirement savings if you want, or for some other purpose. The important thing is that the extra shares that are purchased through the automatic reinvestment of your dividends start to add up. The more shares you have, the more money you will have in the end. Over the course of years, your DRIPs could conceivably result in dozens â€“ or even hundreds of extra shares in a company or fund.
It is also worth remembering that as your shares increase, so do your dividend pay outs. Because your dividend earnings are based on the number of shares you own, an increasing number of shares results in increasing dividends. So you get more shares, essentially for free, and that leads to higher dividend payments, which leads to the ability to get more basically free shares through your DRIPs.
Finding Companies that Offer DRIPs
There are a number of companies and funds that offer dividend reinvestment plans. You can make use of sites devoted to helping you find DRIPs, or you can check into your favorite companies and funds to see if they offer these plans. You might be surprised to find that major companies like Coca-Cola offer DRIPs. Online discount brokerages may also provide you with the opportunity to take advantage of automatic dividend reinvestment. If you go with these brokerages, though, it is a good idea to check the terms and conditions to make sure that there is no transaction fee associated with reinvesting dividends.
In the end, DRIPs can be a great choice to build up your portfolio, compounding your investment earnings and helping you prepare for the future.