Here’s a tip: Consider learning about DRIP.
DRIP is an acronym for dividend reinvestment plan, and it’s a program that many brokerages offer, allowing investors to automatically reinvest dividends from the companies they invest in, as those dividends are paid out.
Automatically reinvesting dividends can be a smart way for long-term investors to continue adding new shares to their holdings, which in turn can allow compounding to increase your assets.
What is a dividend?
A dividend is a share of a company’s profit, distributed as cash, usually on a quarterly or annual basis. The amount of your dividend payout is in proportion to the number of shares you own. If you own a lot of shares, your dividend will be larger than if you own just a few shares, or fractions of shares.
Not all companies pay dividends. In fact, it’s very often the largest and most established businesses that do. Companies in the S&P 500 index reportedly paid about $500 billion in dividends in 2019.
You can find out more about dividends here.
Good to know: ETFs are baskets of stocks, some of which may pay dividends. If your portfolio includes an ETF with dividend-paying stocks, DRIP will automatically use dividends from those stocks to purchase more shares of the fund.
DRIP and compounding
With DRIP, your dividends are reinvested automatically, rather than being distributed to you as cash. As a result you’re actually purchasing additional shares, or fractions of shares, depending on how big your dividend payment is. (You can find out more about fractional shares here.)
By reinvesting the cash you receive as a dividend, you can also increase the impact of compounding over time. Compounding is one of the most important concepts for new investors. It’s the echo effect that earnings and dividend payments can have on your total investment holdings, allowing them potentially to really add up over time.
Here’s an example of how compounding works. Let’s say you start with savings of $100 and put $50 a month away for ten years, with an annual return of 5.25%. You’ll have slightly more than $8,000, but you’ll only have put away $6,100. Compounding could add more than $1,900 to what you save.
DRIP can potentially increase compounding beyond the annual rate of return described above, by adding dividend payments to your principal on a regular basis.
How DRIP works on Stash
Stash is excited to present its new DRIP feature, which will automatically reinvest dividends in the stock or fund you own.
Here’s how to turn it on.
Go to the home screen in the app, and click on the Invest tab. Then click on the gear icon in the upper right corner to manage your portfolio. Under Manage your Account, you’ll see a tab for Dividend Reinvestment. Click on that to enable DRIP.
If you’ve invested in companies that pay dividends, or in funds that invest in companies that do, your dividends will automatically be reinvested in the fund or stock for you.