Dividend Reinvestment Plan (DRIP)
What is the Dividend Reinvestment Plan (DRIP) ??
The Dividend Reinvestment Plan, also known as DRIP, is a financial tool that all self brokerage accounts provide. The DRIP takes the cash dividends earned from owning shares of a stock and purchases additional shares of the same stock. No set-up fees or trading fees are needed to purchase the additional shares.
Let's look at a DRIP example: Let's suppose I own 100 shares of XYZ stock, valued at $100, that pay $1.00 dividends each month for per share (yielding 12% per year). Every month, without enrolling in the DRIP, I would receive $100. However, if I enrolled in the DRIP program, instead of receiving $100.00 in cash, I would receive one additional share of the company. Using an on line DRIP calculator, you can calculate how much you will earn over a given time. Continuing with our example, after 5 years our stock will be worth $17,623.42 and $54,735.66 after 15 years. And after a full 25 years, your initial $10,000 investment will be worth an astounding $ 170,000.64 or 1700% more.
How can I get rich from using the Dividend Reinvestment Plan (DRIP) ??
The key to the DRIP is the compounding interest effect that you get. However, the DRIP program is only effective if used over a long period of time (minimum 5 years). Therefore this isn't a get rich quick scheme, instead it is more like a get rich slow formula.
What kinds of stocks would you put into your DRIP??
In my DRIP, I have chosen stocks that I believe will rise with time. Because the energy demand from growing nations is increasing every year, I believe energy stocks will do very well over the next ten years. This will ultimately lead to increased dividends and more shares. However, you may like something else and think utilities are going to out perform the market. The dividend stocks in my DRIPs yield between 5% and 8%.