You know what "Drip" investing is all about, right? It lets you invest in companies directly, either completely or mostly bypassing your brokerage and its commission fees. It lets you invest small amounts, and it reinvests dividends you receive in additional shares (or fractions of shares). It's a great thing, in many ways, serving countless investors very well.
Increasingly, though, you can have your dividends reinvested without having to set up Drip accounts. That's because many brokerages are now offering dividend reinvestment. This topic came up recently on our Discount Brokers discussion board. One community member commented that TD AMERITRADE
One person noted that while he used traditional Drip plans in the past and benefited greatly from them, he no longer sees them as so necessary, since many online discount brokerages are now offering dividend reinvestment along with commission rates that are significantly lower than they were a decade or two ago. He pointed out one of the downsides of traditional Drips, which is excessive paperwork. If you send in lots of small investments every month or so to lots of different companies, each transaction will result in a new cost basis, which would need to be tracked for tax purposes.
Changing brokerages
In addition, he pointed out that many of us will move to a different brokerage firm in the coming months or years, and we won't want to lose valuable purchase and cost-basis data. Storing this kind of information elsewhere, such as in a program like Quicken or Microsoft Money, is a good idea. (Note that changing brokerages can be a very good thing to do -- the brokerage you're using may not be the best one for your needs. Spend a few minutes in our Broker Center, look at our comparison table, or check out our Foolish guide to finding the right brokerage.)
Meanwhile, if you're interested in having your brokerage reinvest your dividends, you have several options. According to one community member, Schwab
Reinvesting is powerful
Reinvesting dividends can be a powerful way to get wealthy. Here are some eye-opening examples from the folks at our Motley Fool Income Investor newsletter service, which tracks and recommends outstanding dividend-paying investments:
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PepsiCo
(NYSE:PEP) : $2,000 invested in Pepsi in 1980 is now worth more than $150,000. You would have started with 80 shares, but by reinvesting dividends, you now would have 2,800 shares. -
Altria Group
(NYSE:MO) : $2,000 invested in the former Philip Morris in 1980 is worth just less than $300,000 today. After starting with 58 shares, today you would have more than 4,300 shares, thanks to stock splits and reinvesting dividends!
You'd have a portfolio now worth close to $450,000, starting with a total investment of only $4,000, and without ever needing to add another penny. Today, your little $4,000 investment is generating more than $6,000 every year in dividends. You're earning more than your total original investment every year in dividends alone!
Sidestep the accounting
You can neatly sidestep the headache of recordkeeping for reinvested dividends by having the reinvestment happen in a tax-advantaged account, such as a Roth IRA.
Or, simply let your dividend income accumulate in your brokerage account until you have enough cash to deploy into a new investment. This could be a new stock holding, or even a new batch of shares in an existing holding. In this situation, you're controlling how many batches of a stock you purchase, and you're more easily able to invest in other companies. This option will give you much of the benefit of reinvesting dividends, but with fewer tax hassles along the way.
