The Power of Dividend Reinvesting

Boom!  Watch out and get out of the way!! Do you see what’s coming?  That’s the dividend  income stream picking up more speed and size each and every step of the way.  Today I want to talk about Dividend Reinvestment or Dividend ReInvesting Plans (DRIP for short).

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What is a DRIP?  This is when the dividends on your stock that you own pay dividends, become reinvested (at partial/whole shares) and are at no cost (hopefully) to you.  I am lucky and all my brokerages give me the option to opt in or opt out of the DRIP plan, with no cost to reinvest to buy more shares.  The benefits of the DRIP Plan are as follows:

Benefits to DRIP:

  • Mind-free investing: You do not have to worry about when to make an investment or that you forgot to pick up more shares
  • Dollar-Cost Averaging: Typically, you are now about to pick shares up lower than what you initially paid for it – obviously one of the cons is – the stock could appreciate and be potentially overvalued, thus your cost goes up on average
  • Timing: You don’t have to worry about timing the market
  • Cost: Most services offer this for free – to reinvest dividends and pick up shares
  • Income Increase: With the reinvestment into more shares – your income (barring the dividend doesn’t decline) goes up!
  • Stream Effect: Those new shares now produce new income and that income, given the trend of a good company, may increase due to a dividend increase and then all your shares produce dividends to buy more shares and I think you understand the cycle I am explaining here : )

Cons to DRIP:

  • Increase in Avg. Cost: Your cost on average may increase if the share has gone through price appreciation
  • Value: The shares you may be reinvested into may have a price that shows over-valuation in relation to their earnings, thus your reinvestment may not be timed the best
  • Cost: As it was a benefit above – some brokerages may charge a slight fee for this service, I would check with them first

A great example of a solid DRIP stock from my time as an investor is Lockheed Martin (LMT).  I initially purchased them in the upper $60 range back towards the end of 2010, roughly 29 shares or $2K worth and annual income of about $73.  At the time they were paying a $0.63 per share per quarter dividend and the yield was approximately 3.65-3.75%.  They began experiencing large growth and appreciation in the stock to go with it, but before year end of 2010 they increased the dividend from $0.63 to $0.75 or a 19% increase.  I haven’t added any to my cost and the stock has undergone 3 more increases since then – 2011, 2012 and 2013 to the tune of 33%, 15% and 15.6%.  I have reinvested all of my dividends since then, however.  With price appreciation and dividend increases, along with reinvestment, my total value of LMT is $5.4K!  The annual dividend income has gone from $73 to $177 or 142% total growth since my annual income at inception.  Very lucky and fortunate, of course, but I believe that in due time – that is the true power of dividend reinvestment, patience and why I choose to check the box “yes” for the DRIP option.

Anyone else have similar fortunes?  Any other pros/cons that I am missing?  Here is to the next round of dividends and to reinvestment, enjoy!

-Lanny

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26 thoughts on “The Power of Dividend Reinvesting

  1. Depending on the broker you may be able to purchase fractional shares. However, in my situation my broker doesn’t allow me to purchase fractional shares with dividend, so i must buy enough shares of a company to have enough to purchase 1 whole share. can be pricey but in my opinion if you have the means it can be worth while. Another thing that i would like to add is the DRIP discount some companies share. be sure to know if your broker honors the DRIP discounts as some do not.
    Congrats on your success though, I have only been investing for the last 10 months and i hope within a couple years time ill be able to have similar results! DRIP all the way! 😀

  2. Really great example of dividend reinvestment guys! Nearly tripling an investment’s value in just a few years by doing… Nothing! It’s FREE MONEY PEOPLE!

  3. Hey Lanny,

    Great article. I DRIP in my account as well. I didn’t know that some brokerage places charge extra for that service. Fortunately Schwab is one that I can just turn on and off on-the-fly and one in which fractional shares are possible. Currently all my stocks have dividend reinvestment turned on. I’m going to keep doing that until I’m getting about $1000-1500 in cash dividends per month. That way I can then eat the cost of commission and pick and choose the stock with the best valuation. That will be a fun day when I can do that! Still quite a few years away at this point.

    • Scott,

      I see what you’re method is. Right now – wouldn’t make sense to hold cash if it’s under a certain amount because of the timing of usage would be detrimental when you look at the fee standpoint. Do you have a goal when you want to start receiving $1K to $1.5K per month? I can see how that method would be nice – essentially your dividends allow you to purchase, in a cost effective way, one stock per month that is undervalued in relation to your analysis. I dig it.

      -Lanny

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