Dividend Reinvestment Plans – DRIP
You may have heard the term Dividend Reinvestment Plans before or often just DRIP (it’s just an acronym). It also describes what is happening to have your dividends drip money back into buying more stock.
This is what a dividend reinvestment plan is. It automatically takes the dividend and buys more stock, drip, drip, drip. Over time, even without adding any more shares directly, the drip will buy more shares for you.
Getting bigger and bigger each time allowing compound interest to do its thing slowly at first and building over time.
Some companies allow shareholders in their program to buy shares at a discount when in their DRIPs.
Company run DRIP programs are normally where the company will have its own plan – they will allow you to buy shares directly. Some are run by a third party company.
Perhaps the most common though is brokerage run Dividend Reinvestment Plans. No discount on the share price is available this way.
Some DRIPs will have a minimum amount needed before the purchase of more shares will happen. Now that a lot of brokerages are zero-fee, for these, there will not be a minimum. So even the smallest dividends can be reinvested.
Trading 212 Dividend Reinvestment Plans
Currently, Trading 212 does not have a DRIP – It was due to come out this month but has now been pushed back until May along with Trading 212 PIES.
However, just because they do not have a Dividend Reinvestment Plan does not mean we can not reinvest the dividend. Thanks to fractional shares we can do exactly that, just not automatically as a DRIP would.
Having the DRIP option available in May will be very nice. Bear in mind though you may want to reinvest the dividend of one company elsewhere for example. For me, the DRIP will be turned on only for certain companies.
Having the ability to leave the DRIP on for your stronger stocks is a good idea, likewise leaving it off for your riskier stocks is a great idea.
Most people will likely turn the DRIP on and forgot about it, a hands-off approach as it were.
The Power of Reinvested Dividends
At first, you may think it somewhat insignificant but, to show you the power of what reinvesting dividends will do for your portfolio. I shall give an example below.
| Starting Shares | 100 |
| Price Per Share £ | 100 |
| Annual Dividend £ | 5 |
| Dividend Annual Growth % | 5 |
| Stock Price Annual Growth % | 5 |
| Number of Years | 30 |
So, if you chose NOT to reinvest the dividends for 30 years, the results on the above example would be as follows.
| Total Value | £78,099.82 |
| Number of Shares | 100.00 |
| Dividends Paid | £34,880.39 |
| Annualized Return % | 7.09 |
Impressive right? Well yes, until of course, you see what would happen if you DID reinvest those dividends over the same 30 years.
| Total Value | £186,791.86 |
| Number of Shares | 432.19 |
| Dividends Paid | £90,551.93 |
| Annualized Return % | 10.25 |
Just look at the difference. You now have £108,692.04 more just from reinvesting those dividends. Due to reinvesting it means that you now have 432 shares for doing nothing. Starting with 100 and ending with 432. Massively increasing your dividends and annualized return, just from allowing the DRIP to happen and compounding to take over.
DRIP Calculator and my Portfolio
You can have a play around with the DRIP Calculator yourself and see the remarkable power of dividend reinvesting. Dividend Reinvestment Plans are great – the main thing, however, is that your dividends are reinvested, even if it is done manually.
Furthermore, It is reinvested dividends account for an awful lot of the growth in the S&P 500. Surely this is enough to convince anyone to allow their dividends to DRIP back in to buy more shares.
Check out my portfolio below – Already I am getting an average of £33 a month in dividends. If you had not guessed yet I am reinvesting them all each and every month.
Also, I’ve implemented Fink API into my Google Sheets spreadsheet as seen in the video. To pull dividend pay dates and ex-dividend dates automatically. Finki API is a free service as well!
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None of the above should be used as financial advice, I am not a professional. Always do your own research.
Thanks,
Sean
Great post Sean, the power of compounding and reinvesting dividends are eye-opening. I wish I had all this info when I just started work and not now I’m retired…LOL Seriously though anyone in their 20-40 years ranges with motivation, discipline and some planning has a great opportunity to build significant wealth from a small beginning.
Absolutely, Investing is pretty unheard of in the UK – it is seen as something just rich people do. At least in the USA it is much more mainstream! Thanks George
I think you’re right when you say that many people in the UK still think that investing is something that rich people do. Or that investing is akin to gambling. None of my friends invest, apart from in their work pensions.
It doesn’t help that the biggest click-bait headlines are almost always of people winning big like the Wolf of Wall Street, or losing all their money (people who put their life savings in a single share).
A strategy like dividend investing won’t get you rich overnight but is a viable long term strategy to build your wealth. Such slow journeys don’t make for sexy headlines because people are just so impatient and want to get rich fast!
Absolutely. Hopefully, the likes of Trading 212 and Freetrade are shifting the idea of needing to be rich to invest. Great film though, as you say it would not make good entertainment showing a steady stream of dividends coming in haha.