You may have heard the term ”DRIP“ and asked yourself “What is that? Well, wonder no more! In this post I will be explaining DRIP from the eyes of a beginner and helping everyone reading understand this incredibly powerful investing tool. 

The Acronym DRIP stands for Dividend Reinvestment Plan. This is just a fancy way of saying “If you own dividend stocks those very stocks will pay you a portion of the company’s earnings (usually paid out once per quarter but some do vary) just for holding them, nothing more.”  

Dividends could be paid out in two ways: 

1. Cash 

2. Additional stocks (DRIP) 

Cash is just that you get the payment as income which is a nice way to earn money with little work. 

If you decided not to take the cash option and pick DRIP instead, the money that would have been paid out to you is instead used to buy additional shares of said stock. This is most beneficial because it allows you to buy fractional shares.  

Let’s use a very simple example, let’s say stock XYZ is paying out $1.00 in dividends and that stock is trading at $10.00.  You would receive 1/10 of a share just for holding that stock. 

This really helps grow your position whether the stock is either cheap or expensive. Here’s another example, say you own Coca-Cola Co stock, (symbol KO) which at the time I’m writing this blog is trading at $44.88, you can increase your position by a whole share depending on how many shares you have of this stock. 

For KO you would need to own 109.5 shares to get one full share from your dividend reinvestment.  Just to make that clear, this would be per quarter, but if you are thinking about yearly, the shares needed would only be around 27.375 shares to see one full share growth in a year. Think about that for a second, you are gaining an extra share of KO from just holding those 109.5 or 27.375 shares, that compounded over years will really add up to some real money. 

Let look at a stock that is trading at a higher price like 3M (stock symbol MMM) which is trading at $157.04.  You would have to own 106.9 shares to get one full share from your dividend reinvestment. Doing the math that’s a lot of money to have invested in 3M to see that full share and that’s where the power of DRIP comes into effect. You really don’t need to have that many shares.  If you just own 26.725 shares you would see that full share in less than a year because every quarter you will be able to get a fraction of 3M shares which would add to your position and the growth is never ending. 

Another thing that I would like to tell you about is that DRIP also takes advantage of what is called “dollar-cost averaging”.  When it comes time for the dividend to be paid out you are getting the shares at whatever the dictated price is at that time. This means that you are reducing the impact of volatility on the overall purchase and never buying the stock right at its peak or at is low. Instead, you are just averaging out the price as the stock is moving up and down over time. 

I will leave you with this, if you don’t need the money that you are earning from your dividend, you should consider enrolling in DRIP because you will benefit way more over time from taking this route instead of just taking the cash.  

Over time these small DRIP payments will only get larger and larger helping your account see some real movement year after year, not just in capital but in your overall position holding. It will help your account grow from a seed to a full-grown tree where each branch is paying out for your future. Be patient so all your hard work and time will pay off. 

And as always, have a great day and keep learning and moving towards your goals, never stop pushing!