Most Canadians, when they see the word drip, think of leaky faucets or runny noses. But not investors. When they think of drips they see dollar signs.
A DRIP, in investing lingo, stands for dividend reinvestment plan. It’s one of the easiest ways to accumulate wealth. And there’s nothing fancy about it -- it simply means that any dividend payments you receive are used to buy more stock. The more stock you buy, the more wealth you accumulate. Hopefully, those stocks will eventually go up and you’ll make a handsome profit.
Is your interest piqued yet?
Shares for freeâ€¨
When you own a dividend-paying stock such as a bank or utility, you get a regularly quarterly payment. You can use that money for anything, but a lot of people use it to buy more stock. While you’re not exactly getting more shares for nothing, this is money that you don’t have to take from a paycheque. You’re using the free money you earn from owning the stock to buy more of the stock.
One of the main reasons to use a DRIP is that it’s automatic. You don’t have to physically buy more shares of a company every quarter. You set up a DRIP through your bank, investment company or online brokerage, and the payments made to you by, say, Bell, are automatically used to buy more Bell shares.
Get a discount
â€¨Companies want people to buy stock, so in some cases investors get a discount for using a DRIP. In 2009, Loblaw offered investors a three per cent discount on its shares if shareholders used its DRIP option. Some companies offer as much as five per cent off.
â€¨In many cases, using a DRIP costs nothing. If you were to reinvest dividends in stock without using a DRIP you could be hit with regular commission fees. A DRIP lets you buy more stock without paying those fees. So not only are you building wealth by reinvesting -- and getting a discount -- you don’t have to pay any extra costs.
Buy fractional shares
â€¨Another huge benefit to using a DRIP is that you can buy a fraction of a share. Usually you have to buy a whole share when you buy stock, but not with a DRIP. If your dividend payout isn’t enough to by a single share, you can usually buy part of it. Eventually, you’ll own a full share -- and more -- as dividends keep getting reinvested. In other words, every cent of that dividend is used to buy more stock.
Investors love the DRIP because it’s an easy way to build wealth. After years of reinvesting dividends, you’ll end up with a lot more stock than you could otherwise afford. This isn’t a get-rich-quick scheme, but do this over a lifetime and by retirement you could have some pretty significant savings.
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