Drip investing is a strong investment strategy. It helps people meet their financial goals by automatically reinvesting dividends. By using dividend payments to buy additional shares, drip investing takes advantage of compounding returns. This steady approach encourages disciplined investing. It also has the power to increase wealth over the long term.
Think about planting a tree. At first, you have a small sapling. As it grows, it produces seeds and if those seeds fall in good soil, they grow into new trees. DRIP investing works the same way. When you buy stock in a company that has a DRIP program, it's like planting your first tree. The dividends you get are like the seeds. Instead of taking these seeds (dividends) home, you let them fall right back into the soil (reinvest them). Over time, you end up with a whole grove of trees, all growing and making new seeds.
Let's break this down with a real example. Say you buy 10 shares of a company for $10 each ($100 total). The company pays $0.50 per share each year in dividends. Instead of taking your $5 in dividends as cash, you use it to buy half a share more (remember, DRIPs let you buy partial shares). Now, you have 10.5 shares. Next time dividends come, you'll get $5.25 instead of $5. This keeps growing, little by little, year after year.
Think of a DRIP like an automatic savings plan at your bank, but better. With a bank savings plan, you might put in $50 each month. With a DRIP, the company is putting in money for you every time they pay dividends. You don't have to remember to do anything - it all happens automatically.
Here's what happens behind the scenes: Let's say you own stock in McDonald's. Every three months (quarterly), McDonald's looks at how many shares you own. They multiply this by the dividend amount for each share. Instead of sending you a check, they take that money and buy you more McDonald's stock automatically. They even let you buy partial shares, so every penny gets reinvested.
Imagine buying shoes directly from Nike instead of going to a shoe store. That's what a company DRIP is like - you're dealing directly with the company. Many big companies like Coca-Cola and Johnson & Johnson offer these plans. The good part is they often give you a small discount on shares (like getting 2% off) and charge very low fees. The downside is you need separate accounts for each company.
This is like going to a big department store where you can buy many brands in one place. Companies like Fidelity, Charles Schwab or E*TRADE let you set up DRIPs for lots of different stocks in one account. It's easier to manage, but you might not get the special discounts that company plans to offer.
Think of dividend dates like a concert ticket. There's the day tickets go on sale (announcement date), the last day to buy tickets (ex-dividend date), the day they check your ticket at the door (record date) and the day of the concert (payment date). With dividends:
Think of starting a DRIP like getting a driver's license. There are specific steps you need to follow: