The greatest enjoyment of dividend investing is receiving little tiny paychecks throughout the month- it is magical. There is nothing like waking up to find some new money in your account. However, when you reinvest your dividends, some of that fun is taken away, at least for the time being. But, to answer the question, yes, you should re-invest dividends- however, there is more to the story. Don’t forget to check out Investing for Dividends 101 and 102.
Dividend Re-Investment Program (DRIP). The official title of dividend re-investing is the Dividend Re-Investment Plan or DRIP. Back in the day, you would have to contact the company of the stock you held and ask them to turn on DRIP for you because there were no fractional shares. I am sure that was a pain in the rear end.
Today, DRIP is so much easier to turn on. Each brokerage has its form of DRIP, and they all have different pluses and minuses. I will go in-depth in these different types of DRIP in Investing for Dividends 104. They all take advantage of the stock market’s three most powerful forces: the compounding effect, dollar-cost averaging, and dividend raises.
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Compounding Effect. The compounding effect is said to be the most potent force on Earth. Maybe, I wouldn’t go that far, but it is a mighty force. When you reinvest dividends, you will have a second person assisting you in your financial journey.
Keep in mind that everything in your life will be compounding throughout your journey of financial independence. You will begin to compound your self-education, budgeting skills, and creation of multiple incomes. Over time you will be adding more and more money into your money system, and the system will produce more dividends. Those dividends will start to work even harder for you. The compounding effect is more than just re-investing dividends- read the book “The Compound Effect” for a more in-depth look at this phenomenon.
Dollar-Cost Averaging. Dollar-cost averaging is the best way to purchase stock over the long run. By dollar-cost averaging, you buy more stocks when the stock price is low and fewer stocks when the price is high. Over time, the effect of dollar-cost averaging can be powerful. With DRIP, dollar-cost averaging is already built-in for you. Whether you are receiving dividends monthly or quarterly, with DRIP, you are covered.
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Even if you stop actively purchasing a stock, with DRIP, you can still take advantage of the compounding effect and dollar-cost averaging. Your stock will slowly grow more and more shares over time, and if the price of the stock rises, it is even better for your portfolio. Next up is my final point- dividend raises.
Dividend Raises. There is more goodness to be had in the form of dividend raises. If you are taking your time and picking good dividend companies, these companies will be raising their dividends annually. When a company raises its dividend, this adds to your compounding effect and adds more money to dollar-cost average. Over time, these raises alone can increase your account exponentially.
Strategies for DRIP. Your system for DRIP will depend on the platform you use. I use five different platforms, and each has its version of DRIP. I will conduct a deep dive into the different strategies I use in the next article; however, here is an example.
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If your platform pays dividends into your brokerage’s cash account, you will start to accumulate cash. Wells Fargo brokerage behaves this way. I can then use the money to purchase new stocks, growth stocks, or different dividend-paying stocks. In this plan, I am not directly reinvesting into the same dividend stock. Diversifying your portfolio this way can set you up for the future and maybe get you some good returns. The best part is that in my other accounts, I am using the standard form of DRIP. Only your imagination can hold you back.
Enjoy some dividends. I am writing this particular article because I started to spend a small number of my dividends, as I receive them. By small, I mean like 5% or less. The reason that I started this is that I will never live off of my dividends. They will supplement my other retirement cash flow. With this logic, they may as well increase my lifestyle a little today.
I wrote about living from investments in the article “How the Rich Buy Their Bling.” In summary, the rich obtain their assets first, receive income from these investments second, and finally buy their luxury items.
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In my world, I could receive $20 of dividends, then take my wife to lunch. It feels good to have someone else fund your meal. Over time, maybe this becomes a hotel stay or perhaps a weekend vacation. That is the power of investing for dividends- in the long run, they can fund parts of your lifestyle.
By re-investing dividends, you will take advantage of 3 forces of exponential growth- the compounding effect, dollar-cost averaging, and dividend raises. Therefore, you must re-invest dividends to get the full product; however, I recommend using a little of your dividend income for fun, even if you buy yourself a candy bar or movie ticket.
When you spend a little of your dividend income on yourself or your family, it allows you to see a future where dividends will play an even more prominent role in your lifestyle. It gives you a taste of the magic of dividend investing. And that is why we are dividend investing, for the magic of having someone else fund our lifestyles!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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