How DRIP Investing Has Become a Necessity
VIDEO: DRIP investing has always been a good way to build long-lasting wealth. In today’s low-interest-rate environment, with CDs, MMAs and Treasury bonds offering little in the way of yields, it has become a necessity for any income investor saving for retirement.
DRIP investing has always been a good way to build long-lasting wealth. In today’s low-interest-rate environment, with CDs, MMAs and Treasury bonds offering little in the way of yields, it has become a necessity for any income investor saving for retirement.
Hi, I’m Chris Preston, Staff Analyst with Cabot Investing Advice. I wanted to talk a little bit today about DRIP investing. Most people know about dividend stocks and the power of investing in dividend stocks as a way to build wealth and supplement income over time, especially in today’s low interest rate environment, with traditional avenues of income investing, such as putting money in a CD or money market account, basically dried up.
But what you may not know much about is DRIP investing. DRIP is an acronym for dividend reinvestment programs, and what that means is if you invest in, or if you buy a dividend stock, you can have the option to enroll in a DRIP program, which allows you to accrue the dividends you get back. They go automatically toward buying up more shares of the stock that you are invested in.
So, for example, if you own shares of Coca-Cola. Say you bought 10 shares of Coca-Cola, and the dividend pays, say, 50 cents per share per quarter. Well, that 50 cents gets enrolled back into the stock when you’re enrolled in a DRIP, every quarter. And if you have 10 shares, that’s 50 cents, times 10, is $5, gets enrolled back every quarter. And that adds to the amount of shares that you own and to the overall value of your stock. And over time...it’s called a DRIP because it’s an acronym, but really it has sort of a double meaning. The slow drip of the reinvestment every single quarter, it’s a slow drip, but it adds up over time, and over the course of 10, 20, 30 years, if your dividends are being reinvested automatically every quarter, that adds up, especially for stocks that traditionally grow their dividends, Dividend Aristocrats, stocks like Coca-Cola, WalMart, Procter and Gamble, and Johnson and Johnson.
And actually, I have a personal story with how DRIP investing worked well for me. My grandfather, years ago, gave me shares of Procter and Gamble, which at the time had already been raising its dividends for close to 50 years, and has continued to do so. And he enrolled me in a DRIP program, and at the the time I knew nothing about DRIPs or hardly anything about investing. So I didn’t fully understand the power of the DRIP program. And over time, I started to see that my shares were accruing, even though the share price of Procter and Gamble wasn’t budging a whole lot.
And over 10 years, I was able to build up into a pretty good value in a stock that, granted I didn’t pay for it, but stock that hadn’t budged a whole lot, but because of the dividend being reinvested and because of the yearly dividend growth, really added up, and actually, to the point where we were able to use that Procter and Gamble stock. We were able to sell it and use it in the purchase of, my wife and I, when we purchased our first home. A lot of the down payment came via the Procter and Gamble DRIP.
So, DRIPs can be a powerful way to invest. It’s especially a good way for those who are wanting to put their savings somewhere other than, obviously, a low-interest CD or a money market account, and just see their investment accrue over time. And it’s particularly effective with dividend growers. And it’s a especially good way...we sold ours probably earlier than most should, to pay for a house, but it’s an especially good way to save if you have young children, you want to save for them going off to college, save to pay for your daughter’s wedding 20 years down the road, or whatever. DRIPs are a good way to build wealth and to see your money accumulate over time with really without having to do much.
For Cabot Investing Advice, I’m Chris Preston.