Dividend reinvestment programs (DRIPs) allow investors to reinvest the dividends paid on a company’s stock and buy additional shares. Thus, rather than receiving a dividend check, the number of shares they own in the company increases by the amount of the dividend paid.
For instance, if you owned 500 shares of a stock worth $10 a share and it paid a dividend of $.10 per share, you would normally receive a check for $50. If you enroll in a DRIP, instead of taking the $50 in cash you would reinvest it by purchasing $50 worth (5) of additional shares, bringing your total shares up to 505.
Reinvesting dividends in this way enables retail investors to acquire more shares of a stock, mutual fund or ETF without having to pay a brokerage commission. This makes DRIP plans a cost-effective method of adding to your holdings in an investment.
One of the key benefits of dividend reinvestment is that your investment can grow faster than if you pocket your dividends and rely solely on capital gains to generate wealth. It’s also inexpensive, easy, and flexible.
Reinvesting dividends subjects the reinvested money to investment risk if markets experience a downturn. If you want to increase your cash reserves or level of funds that are not invested in the market, and thus minimize investment risk, having dividends paid out in cash is the alternative.
SmartWealth enables automated dividend reinvestment, whereby the dividends you receive periodically will by default be reinvested into the portfolio, rather than having them deposited in your bank account.