It's a strategy that isn't discussed often in the financial media, and on top of that, it has an odd name. So if you're wondering why you need to know how to invest with DRIPs, just wait until you learn how powerful they can be.
DRIPs are Dividend Reinvestment Plans – at its most basic, a simple, easy way for long-term investors to reinvest money into a company they already own.
Dividends by themselves are a great thing.
A number of studies over the years have shown that dividends accounted for more than 60% of total U.S. stock market returns since the 1870s.
But guess what happens when you reinvest those dividends?
The book Triumph of the Optimists: 101 Years of Global Investment Returns foundthat, in the 20th century, a portfolio with dividends reinvested returned about 85 times the wealth of a similar portfolio that relied solely on capital gains.
Clearly, anyone interested in accumulating wealth over the long term needs to take a very close look at investing in DRIPs.
DRIP Investing: What Are Dividend Reinvestment Plans?
Dividend reinvestment plans, or DRIPs, are special programs sponsored by corporations that allow shareholders to immediately reinvest their regular dividend payouts back into the company's common stock.
And many DRIPs have been set up by companies known as "dividend aristocrats." Such companies have increased their dividend payouts every year for decades.
But while those companies are ideal for DRIPs, well over 1,100 companies offer a dividend reinvestment plan.
Companies do this because it benefits them in two major ways.
First, it is an ultra-cheap source of additional capital for the firm. And second, investors that participate in DRIPs offer companies a very stable shareholder base. Such investors are much less likely to panic and sell out at the first hint of trouble in the stock market.
The Benefits of DRIP Investing
But retail investors derive even more benefits from DRIPs…