DRIPs — Direct Investment Plans
Reinvest dividends and maximize your portfolio's growth potential
DRIPs are a little-known feature of almost every brokerage account. DRIPs allow investors to automatically reinvest their dividends into additional shares of stock. It's the best way to make your nest egg grow.
For example, shares of Johnson & Johnson (NYSE: JNJ) pay a ~3.5% dividend per year. Using DRIPs, you can automatically receive more shares of stock instead of the cash dividend payment. That way, the next time a dividend is paid, your payment is bigger (because you have more shares). A Dividend Reinvestment Plan automates all of this and makes it easy.
Let a DRIP work for you for a few years and it will create a powerful compounding effect, which grows larger over time.
It's one of the easiest and best ways to build long-term wealth.
1) Dividends 101
This is a quick refresher course on dividends. If you're already familiar, you can skip ahead to section 2) Using DRIPs.
So What is Dividend Yield?
Dividend yield is simply your rate of return from dividend payouts, exclusive of any stock price appreciation. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock.
For example, your dividend yield is 5% if you paid $20 per share and you receive $1 per share in dividends ($1/$20) over the 12 months following your purchase.
Dividend yield, however, is not a fixed number; it changes along with the share price.
For instance, say someone else buys the same stock a week later when the share price has increased to $25. Instead of 5%, their dividend yield would only be 4% ($1/$25).
In short, it is a cash payout that you receive for simply being a shareholder — sort of like receiving a bonus based on the company's earnings. Moreover, these "bonuses" also offer lower tax rates than similar investments in savings, CDs, or money market accounts.
And once you receive your dividend payout, there is only one rule to live by if you're serious about building a nest egg you can depend on:
Remember the Rule of 72 — Compounding is one of the most powerful forces known to man. That's where the Rule of 72 comes in. The rule says that in order to find the number of years it takes to you double your investment at a given rate, you just divide the yield into 72. For example, if your are earning a 9% on your investment, it only takes eight years to double your money. . . and roughly 13 years to triple it.
2) Enrolling in DRIPs
Nearly all online brokers, like E-Trade and TD Ameritrade, offer customers free access to DRIP enrollment. Each broker handles enrollment in DRIP programs a little differently. In E-Trade, for example, DRIP enrollment is handled in the "online service" section. Simply go there, select which stocks you would like to enroll, and voila, you're done.
3) The Three Best DRIP Stocks to Own
Realty Income Corporation (NYSE: O). The monthly dividend company is coming up on its 600th consecutive dividend. It recently gave investors their 92nd consecutive quarterly dividend hike. Plus, it offers a dividend reinvestment program (DRIP). So, you can put those monthly payments right back to work in buying more stock. And you can avoid paying broker fees on those new shares.
Bank of America Corporation (NYSE: BAC). Bank of America has proven us right time and time again. It's generated massive stock gains for investors (including Warren Buffett) as it shook off the dust from the mortgage crisis. And we've seen the dividend grow from a measly $0.01 to $0.15 per share every three months. We don't expect the same kind of stock price growth, but we're betting on that dividend increasing. Make sure to take advantage of BAC's DRIP option, as well.
Cisco Systems, Inc. (NASDAQ: CSCO). Cisco didn't give investors all the money we'd thought it would in 2018. But it did give a lot. There was a dividend hike to start the year. And management announced a $25 billion repurchase plan in February to celebrate tax savings. But the company still has over $42 billion in cash on hand. That means you can expect another dividend increase this year. Cisco has a DRIP like all the others on this list. So, I strongly recommend you take advantage.
Important: Always consult a financial professional when making financial decisions.
Until next time,
@BritonRyle on Twitter
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.