The best way to make money from dividends is through the power of dividend reinvesting. It's compound interest on steroids.
There was a point in time when stock investing was only for rich fat-cats. Most of us likely grew up thinking about Scrooge McDuck or the Monopoly guy when we thought about investments. And when it came to investment terminology, like dividends, well, many of us may have just wondered where we could divide a good slice of pie.
Thankfully, technology has helped make stock investment much more user-friendly. Sites and apps like Scottrade, Acorns, and SigFig make stock market investing simple enough that even those of us without monocles can do it. But there’s a certain type of investment that even casual investors – as well as the more serious traders -- should strongly consider: dividend reinvestment.
It’s best to learn about the concept of a dividend before diving into dividend reinvestment. Not all stocks you purchase will pay dividends, so you may or may not already have some that do.
A dividend is the money paid out by a company to its shareholders. Often coming in as a quarterly payment, that dividend is paid out of the company’s profits. Stocks that pay dividends are among the most popular for investors, as it’s a great way for investors to make money off of the stock without having to sell that stock at high points. In fact, John D. Rockefeller once stated, "The only thing that gives me pleasure is to see my dividend coming in." If even Rockefeller was excited about dividends, you should be too.
Dividends can vary, but they’re generally a percent of the value of one stock. So a stock that’s worth about $40 might have a dividend yield 2.5%. If paid quarterly, you would get $0.25 per quarter in your pocket just for owning the stock, or $1 a year. Now let’s say you owned 200 shares of that stock. That’s $8,000 total for the stock, but you’re also getting $200 a year extra in dividends. Not a bad bit of pocket change!
You can do what you want with those dividends, such as buy a new jacket. But the best use of those dividends is in dividend reinvestment. This is when you take those dividends and use that money to purchase more stocks. And if you’re using that money to purchase more of the stocks you already own that are paying those dividends, that means that you’re increasing your dividends every year.
Hopefully, you see where we’re getting at here. Simply owning enough of a company’s dividend-yielding stock means you can keep purchasing more of that stock and increasing the dividends. It’s a great way to build wealth, even with a comparatively small initial investment.
The technology that makes even your average Joe feel like a Wall Street fat cat can also be used to help you reinvest your dividends -- even automatically. Those programs will use Dividend Reinvestment Plans (DRIPs), and Scottrade’s version called the Flexible Reinvestment Program (FRIP) to help you reinvest those dividends in a way that not only makes sense but helps maximize the value of your dividends.
What may come as a surprise to some new investors is that you don’t actually need a lot of money upfront to start building a good portfolio based on a DRIP. Even a small investment can grow significantly over time with a DRIP, and as you have cash available, you can always purchase more stock to increase your holdings.
You can even purchase DRIPs from some of the largest companies around, many of which offer their own DRIPs for eager new investors. Or, you can use a brokerage like Scottrade and utilize their version to help you manage your DRIP.
Sure, DRIPs might not sound as exciting as furiously yelling “buy!” or “sell!” from the stock market trading floor, but it’s a safe, easy and effective way for investors of all calibers to build wealth. As billionaire George Soros once stated, “Good investing is boring.” DRIPs may not get your adrenaline pumping, but they may put a smile on your face while adding some weight to your investment portfolio.