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Last post 4 years ago by Pudding Mittens. 1 reply replies.
DRIP investing
Pudding Mittens Offline
#1 Posted:
Joined: 08-15-2016
Posts: 1,291
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Hi folks. After a recent post I made that mentioned investing with DRIP, several guys asked me what DRIP means, so here ya go:

It stands for "Dividend ReInvestment Plan".

It's a way to reinvest distributions made by an investment into more shares of that same investment, automatically and for free, typically including fractional-share capability so the entire amount is put to work.

For example, let's say you own 200 shares of 3M stock (ticker symbol MMM). This company currently pays shareholders a quarterly dividend of $1.47 per share. This means that currently, four times a year they'll pay you $294.

With DRIP, the moment 3M pays you that $294, it gets automatically re-invested in more shares of 3M. Today the stock closed at $158.56 per share, which means if it happened today, you'd get an extra 1.854 share (294 divided by 158.56), bringing your total share count up to 201.854.

This would continue every quarter automatically, you don't have to lift a finger, ever. There are two really cool parts to this:

1. The shares you get via DRIP kick off their own dividends, too! That means the next quarter, you'd get $296.73. The amount goes up each quarter, because you have more shares each quarter!

2. If you select a high-quality company with a long track record of increasing dividends yearly (like 3M which has increased its dividend annually for the last 62 years), you're almost guaranteed that the dividend amount per share will also go up after every fourth quarterly payout. Let's assume 3M increases their dividend by 5% next year, that means it'd be $1.54 per share, and you have 201.854 shares, well guess what? Now you'll get $310.86 next quarter!

Because of #1 and #2 above, what you get is an exponentially-growing compounded "snowball" over the years. In the early years, your dividends are modest and grow slowly, but as the years go by it changes to "HEY NICE!" then "WOW!" and eventually "HOLY CRAP!" as you're getting potentially many thousands of dollars each quarter, just for breathing and staying alive! Also, in addition to those big quarterly payments, you will have also accumulated a very large number of shares, which you can sell for a large amount of cash, too!

Most brokerages let you DRIP stocks, mutual funds and ETFs, Exchange-Traded Funds (the latter two are very similar to each other, being diversified "baskets of stocks" under one symbol). After this point I refer to mutual funds and ETFs collectively as just "funds".

DRIP used to be a pain in the ass to do because you had to open an account with every stock or fund you wanted to use it for, but it's much easier nowadays because major brokerages offer it in a single place for all your investments, and for free with fractional share support too. You activate DRIP in just ONE place (your brokerage account), and the broker does DRIP for ALL your stocks and funds. Very convenient.

Also, a few months back the major brokerages eliminated commissions for buying and selling most stocks and ETFs, which was an unprecedented, historic move that makes getting started for the "small guy" easier than ever! Now, not only are automatic share buys via DRIP free, but so are the share buys you do manually (both the shares you buy initially, and the shares you manually add over time). It used to be $5-10 per buy or more, but now it's free!

DISCLAIMER: There are often tax implications with DRIP, investing involves risk, etc. etc., so make sure you understand what you're doing and get advice from a tax and/or investing professional before you start. I'm not credentialed that way, so don't act on what I say, ask the pros!

Once you get into this, when you see some item for sale you don't need, you begin to think, "Do I want this, or a giant sack of money down the road by investing the money this item WOULD'VE cost into DRIPped stocks/ETFs instead?

You end up spending less and building quite the wealth base for yourself over time!
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