1 Thing You Must Do Now With Every Stock You Own

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When investing for your future, the most important factor on your side is time. The power of compounding your returns is what will create real wealth in your account, as long as you do it the right way from the start. One of the most important things to do is to have your dividends reinvested automatically, and to do this with every dividend-paying stock you own, no exceptions.

You'll be surprised at the kind of impact this can have over a long period of time with your favorite stocks, and will want to enroll your entire portfolio in a DRIP right now!

Why you should use a DRIP
A Dividend Reinvestment Plan, or DRIP, is basically a way to have your dividends automatically invested into new shares of stock. All of the major brokerages offer this service, and you can use it for virtually any dividend stock.

These reinvestment plans work so well because it lets you harness the power of continuous compounding without having to pay commissions. This is an especially good system to use in a retirement account because it allows for tax- and commission-free growth of high-income stocks.

Reinvesting vs. Income results
To illustrate the importance of reinvesting dividends, let's take a look at Wells Fargo (NYSE: WFC  ) , which is considered one of the most solid bank stocks around, and has historically paid pretty good dividends. I'd like to consider two situations for a hypothetical $10,000 investment over 30 years (or 120 quarterly dividend payments): reinvesting dividends with a DRIP or simply collecting the dividend income from your shares.


First, if you had invested $10,000, your shares would have appreciated in value to about $443,000 and you would have earned just over $137,000 in dividend income along the way, for a total of approximately $580,000. Not too bad, right? That's a profit of $570,000 on our initial investment!

With a DRIP, the final value of your $10,000 investment would be more than $1,160,000, or about $20,000 more than without automatic reinvestment. Put another way, the $1,200 or so in commissions you would have paid by not enrolling in a DRIP cost more than $20,000 in gains. The commissions do indeed cost a lot more than $9.99 each over the long run! $20,000 can mean being able to buy a new boat, or help your grandchildren out with their tuition when you retire, and it is silly to give up those extra earnings when it is so easy to let a DRIP work for you.

Your future depends on it!
While this is a good example of the power of compounding dividends commission-free, also consider that this effect gets amplified even more the longer that you use it. This could make a tremendous difference in how your retirement nest egg grows over the next several decades, so it is absolutely imperative that each and every dividend-paying stock you own is enrolled in a DRIP.

Nine great choices for your DRIP
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (13) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2014, at 10:23 AM, dackerman21 wrote:

    Oh Stop. DRIPS are over rated.

    Any very intelligent investor will do what Warren Buffet does. They would use the cash from the dividends of their investments and go buy stocks in more attractive dividends. Or, if the company that paid the dividend, is still at a reasonable price, than they would just buy more shares.

    The problem with DRIPs is that you are just buying at any price. If KO is up 500% from your initial investment, wouldn't you be better served trying to use the cash from that dividend to go find the next KO?

    Price matters when buying individual companies. They need to be at a reasonable price.

    I'm all for dollar cost averaging in S&P indexes, but I'm against using DRIPS to just add shares at any price of the companies you already own.

    Put more money in your absolute best individual stock ideas at reasonable prices, and less money in your less best ideas. Use the cash from the dividends of your already existing dividend paying companies to invest more shares in your best ideas.

  • Report this Comment On March 15, 2014, at 11:27 AM, Jim2B wrote:

    If you want to invest and leave your investments alone, I agree that DRIPs are a good way to go.

    If you plan to take a more active role in your investments then I agree with the previous poster: take your dividends as cash and use that money to find and buy the best stocks you can find. Sometimes it will be the stock that paid the dividend, most of the time it will not.

    Taking your dividend as cash for reinvesting is particularly attractive in retirement accounts where the transaction isn't taxed.

  • Report this Comment On March 15, 2014, at 11:33 AM, snickerdoodle9 wrote:

    @IMatthew Frankel : I totally agree ! This method of " long term " investing definitely has been working for me . If you have heard of and or recall of a secretary ( Grace Groner ) who was employed @ Abbott Laboratories ( ABT ) during the years of the depression ( 1930's ) she bought 3 shares of the stock @ $60.00 a share . Googled information :

    In 1935, Grace inadvertently made what might be one of the most lucrative and luckiest investments in history. At 26 years old, Grace took every penny she had saved in the world, roughly $180, and three $60 shares of Abbott preferred stock. FYI, $180 in 1935 is worth roughly $3000 in 2013 inflation adjusted dollars.

    Over the next 75 years Abbott Laboratories' stock split dozens of times. When a stock splits, you get twice the number of shares for half the price so for example three $60 shares becomes six $30 shares and so on…

    I am doing the same thing w/ high yield dividend stocks of I which purchased in $100 segments over the last 34 months of a portfolio that I self construct , self direct , and self manage . Of quarterly and monthly reinvested dividend payouts , every month the profits continue to roll in and compound the growth of my portfolio . As for buying mores shares of stocks ( dividend / growth ) , I build my cash reserve from the corp bond / blue chips which pay once every 6 months as opposed to tapping the cash in the brokerage ATM . In other words I like staying out of trouble when it comes to " someone else's " money .

  • Report this Comment On March 15, 2014, at 11:35 AM, tedwarrenlives wrote:

    Motley Fool needs to wake up and talk about how DRIPS are actually an easier way for them to centralize your money and for the collusion of brokerage houses to commit fraud and manipulation to have a mass exodus of your money.

    See GM, MFS GLOBAL..come on Tom and David please stop with the BS?

    Enjoy the money you in the subscription model but now lets actually do the correct thing?

    I often wonder if your integrity and your underlings integrity are not compromised?

    AMRC is a prime example..what a massive fraud advertising campaign by you 2 brothers?

  • Report this Comment On March 15, 2014, at 11:39 AM, tedwarrenlives wrote:

    Ask those who invested in GM before the Crooks of Wall St., GM Management and the Wall St. POS stole it all fro them, the DRIP is NEVER A GOOD IDEA TO PROTECT YOURSELF FROM COLLUSION. Tom and David should get some nads and start being proactiv with who and what they write on your site.

    You two are becoming POS ..don't.

    If you believe the company to be honest, well they maybe for that time but eventually they all become compromised.

    Diversify and stop voting for the REPUBLICANS AND DEMOCRATS to protect yourself.

  • Report this Comment On March 15, 2014, at 11:43 AM, andrewdouglas wrote:

    Exactly correct. I keep around 1/4 of my portfolio in high quality dividend stocks and reinvest around 75%. Market goes down, I get more shares paying more dividends. Sure, I didn't keep up with the S&P on the way up, but I do better on the way down. I will also have a fat income in my old age, taxed at 15%!

  • Report this Comment On March 15, 2014, at 12:20 PM, hanover67 wrote:

    I have re-invested dividends through DRIP plans and I have noticed that I often pay a higher price than the stock traded at that day. I can;t get a straight answer from my brokerage firm as to why this is the case. But, it puts the lie to their claim of "one-second execution"...

  • Report this Comment On March 15, 2014, at 12:55 PM, Poptions wrote:

    I have had mixed results with DRIPS so far. On a rising stock, you get to buy in on a regular basis at an attractive price. However, on a more volatile stock, you could dollar cost average at a higher price if the stock corrects. A case in point is CVR Partners. I have reinvested in this stock for a few years. When they were below $20 the reinvestment was a good deal. However, I have also bought reinvested shares when they reach all time highs of above $29. In this case, I would have been better off collecting the dividends and investing in some other dividend stock or buying more shares of CVR when they were lower. I know that timing the market is a fool's errand, but auto pilot is not always the ideal answer. Ask those who participated in Enron's DRIP.

  • Report this Comment On March 15, 2014, at 1:28 PM, roger142 wrote:

    I still do dividend reinvestment with a few stocks that I believe are solid investments. But as I get older I realize that the buy and hold theory is not as safe as it used to be.

    For example companies like K-mart, Sears, AT&T, and GM used to be considered good blue chip investments, but all those companies eventually had huge problems that wiped out most gains for most people.

    Presently I am selling off my individual stocks and going with various index funds.

  • Report this Comment On March 15, 2014, at 7:30 PM, johnn277 wrote:

    all well and good. how about subtracting the taxes you have to pay before you start flaunting the wonderfuil compunding effects.

  • Report this Comment On March 15, 2014, at 9:16 PM, DRIP101 wrote:

    I have used DRIPS for years and have been satisfied. The only problem comes when selling. The transfer agents can charge some pretty high fees. There are going to be winners and losers as with any stock investment. The object is to have more and bigger winners than losers.

  • Report this Comment On March 16, 2014, at 12:16 AM, Hohum777 wrote:

    Where's the disclaimer that indicates whether WFC is/is not a holding of the writer?

  • Report this Comment On March 17, 2014, at 5:58 AM, Interventizio wrote:

    How about I collect the dividend and then reinvest it in a company I choose? With DRIP, the risk is to get your portfolio imbalanced over time.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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