dividend – Personal Finance

Dividend Reinvestment Plan Explained

Written by R. A. Stewart

A Dividend Reinvestment Plan, (often called DRIP or DRP) is an automated way to grow your portfolio by reinvesting dividends into the same company instead of receiving cash.

It is the same principle as investing for compounding interest.

Think of it as putting your money to work as soon as it is earned.

How a DRIP works

When a company you own shares in pays a dividend, you have two choices:

Cash Payout: The money is paid into your brokerage or bank account.
Reinvestment: The money is used to purchase additional shares (or fractional shares) in the same company.

Most major brokerages and many individual companies offer these plans. In many cases you can “opt-in” through your account settings and the account settings handles the rest.

How it Grows Your Wealth

When you opt into a Dividend Reinvestment plan you are not just owning more shares-its in the snowballing effect over time.

There are three key benefits.

The Power of Compounding

Any dividends which are reinvested into the company will earn dividends during the next cycle which can accelerate your holdings in the long-term. An example is that you own 100 shares in a company. They pay a dividend and the dividend is converted into shares. You now own 102 shares.

Dollar Cost Averaging

DRIPS purchase shares at regular intervals and this means:

(a) When the market is down you purchase more shares-its

(b) When the market is up you purchase fewer shares.

It all balances out in a year which mean that you are practising dollar-cost averaging.

Reduced Fees and Discounts

There are reduced fees because you are purchasing more shares without the need for the normal transaction fees.

It will pay to check on the conditions of the brokerage firm or the online platform where you have invested your money because not all of them are the same.

Important considerations

DRIPS are a powerful tool for wealth-building, there are some things to consider.

Taxation: Dividends reinvested are still considered taxable income of the year that they are received even if you did not receive them in the form of cash.

Stock Imbalance: If a company pays a high DRIP then you could end up with a greater percentage of share in that company in your portfolio.

Income needs: If you may need the money for living expenses then taking your dividends in the form of extra shares may be impractical.

Summary

Feature Benefit to you

Automation “Invest and forget” helps to build discipline

Fractional Shares You own more shares even if it is a fraction of a share.

Compound Interest You accelerate your savings through compounding.

Why companies offer a DRIP

DRIPS are one way companies can generate more cash. Companies have a good idea of how much money they are likely to generate with DRIPS so it is a cost-effective way of raising capital. Reinvesting future dividends into the company means that an investor has confidence in the company’s prospects.

About this article

The contents of this article is based on the writer’s own opinion and experience and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.

Read my other articles on www.robertastewart.com

Dividend Yield and what it means

Written by R.. A. Stewart

A commonly used term in the share market is “dividend yield,” but what does this term actually mean? Some novice investors will be asking themselves but are too afraid to ask others for fear of revealing their ignorance.

The dividend yield is a stock’s annual dividend payments to shareholders as a percentage of the stock’s current price. This figure is often used as a guide to a stock’s future income based on what is paid for the stock.

An example would be, if a stock sells for $10 per share and the company’s annual dividend is 50 cents per share, the dividend yield is 50 cents per share. The dividend yield is 5%. The formula for working this out is annualized dividend divided by share price equals yield. In this case, 0.50 cents divided by $10 equals 5%.

A stock’s dividend can change over a period of time. It may be due to the natural volatility of the markets or changes in the yield by the issuing company. The yield is not fixed and can be changed.

The dividend yield shown on some websites may not be accurate because it has not been updated. One week can be a long time in the markets.

To calculate the annual dividend paid out by a particular company per year you need to multiply the amount of a single payment by the amount of payments.

Keep in mind that whatever yield a company pays out, it is not a guarantee that they will continue to pay out at the same rate in the future. The old adage “Past performance is no guarantee of the future” rings true.

It is important to note that a higher yield does not on its own make a great investment. If the company is struggling then there is a risk that they may not pay a dividend to its investors.

The capital gain of a stock is the other main factor in a stock’s performance. Investors who purchase a stock for the long term are often purchasing for capital gains and this has proved successful.

The high dividend yield may be high due to the falling stock price; otherwise known as a “Dividend trap”. There is a good chance that dividends will be cut in such circumstances.

One retired couple I know uses the dividend payouts to pay for their health insurance. If you are in this position then choosing stocks with a high dividend yield may be the way to go. It is important to diversify and choose a wide range of companies to invest in.

If you do not need the income from the dividends then reinvesting is a good option. It will help to increase the value of your portfolio.

About this article

The information in this article is based on the writer’s experience and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog, website or ebook.

Www.robertastewart.com

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