Everyone is talking about dividends; they are a hot topic for debate among analysts and investors alike. There are various instruments you can use to tap dividends and maximize your portfolio returns. Usually, investors opt for individual stocks and ETFs, depending upon their investing experience. Today, we will be discussing a different instrument – Dividend Reinvestment Plans (DRIPs), which are an ultimate way to maximize dividend returns over the long term. So, let’s dissect this investment instrument to find out how it works, what are its key benefits, and how does it stack up for an Average Retail Investor?
Let me start by telling you that it doesn’t always makes sense to go with a DRIP, sometimes it makes more sense to manage it all by yourself. To get a complete grab over dividend investing you need to learn various financial aspects such as dividend yield, dividend growth, payout ratio and much more. Well, if all that looks like too much hassle then it does make sense to setup a DRIP. Ideally, it’s a good way to lower down cost of investing and enhancing portfolio returns by letting dividends generate compound returns along with the invested capital.
A dividend reinvestment plan lets you purchase additional shares with the dividend amount and this is done automatically. Investors can easily find DRIPs that do not charge any commission, but it depends on the broker that you choose. This helps in creating a highly profitable portfolio by reducing paid transactions that are required while managing a portfolio of individual dividend stocks.
1) You can opt for a brokerage account that supports DRIPs. There are many discount brokers that allow investors to setup DRIPs and do not charge anything for reinvesting dividends. This is the better way to go about it as it hardly takes a few minutes to get started.
2) Then you can opt for starting a DRIP directly with a publically listed company. There is no shortage of quality companies that run their own DRIPs. The best part about this is that you do not need a broker as an intermediary for transacting, so the cost of investing is further reduced. Another great advantage of these plans is that companies allow you to buy fractional shares, so even if your dividend amount is less than the share price, you can still invest your dividend.
So, by now you must have figured that DRIPs are quite easy to get started with and they are a cost effective way to maximize your portfolio returns. Now, you should follow the basic diversification principal and opt for starting DRIPs in different stocks, so as to limit your risk to some extent. However, diversifying with DRIPs could be a challenging task, so it’s important that you pick high quality stocks from different sectors to eliminate any future need of switching your investments. DRIPs are an ultimate tool for average retail investors as they can start with as little as they want. And, since dividend reinvestment comes without any additional cost, it surely helps them boost portfolio returns to a great extent in the long run.