Today I am going to talk about DRIP and how it can help you grow your wealth at an exponential rate. First of all, DRIP has nothing to do with water nor is it a metaphor for investing. DRIP stands for Dividend Reinvestment Plan and that is exactly what it is. DRIP is way for you to reinvest your dividends, usually back into the same equity that distributed the dividends.
Dividends for those that don't know are cash that a company pays its stockholder base on the number of shares you hold. If you read my passive income post you'll see that company like Enbridge (TSX: ENB) pays $0.671 per share on a quarterly basis. I hold 189 shares of Enbridge stocks and therefore I get pay around $127 on a quarterly basis.
How DRIP work is that instead of paying you the dividend ($127 from Enbridge) it will reinvest it for you by buying more shares. In my case, instead of getting $127 I get 2 whole share of Enbridge since they are trading around $50 per share right now and what ever cash remaining.
|A screenshot from my investment account showing how DRIP works. Enbridge recently increased it's dividend payout, therefore this picture don't match the numbers above.|
To set it up, you simply contact your investment broker and tell them that you want to setup a DRIP and they'll get you started. Just remember that for most cases, the dividend payout must be enough to purchase one whole share of the stock.
There are a few benefits for setting up a DRIP. The first benefits is you don't have to pay any commission for the shares you purchase.
The second benefits is DRIP allows you to grow your investment at exponential rate by compounding. Then depending on the frequency of dividends payout you'll be compounding either monthly, quarterly or annually. Most people heard of compound interest and also learned it in school. This is the same thing, instead you are compounding your dividends. Below is a graph that shows the benefits of compounding and the different frequency of compounding.
Here is a quick calculator I found that helps you calculate the return on compound dividends. Calculator. Start investing and start DRIPing, let the power of compound work for you.