You know what "Drip" investing is all about, right? It lets you invest in companies directly, thus 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 online discount brokerages are now offering dividend reinvestment -- along with commission rates that are significantly lower than they were a decade or two ago.
When you consider some of the downsides of traditional Drips, such as excessive paperwork and difficulty tracking small purchases, you may want to look to a brokerage account instead. Some discount brokers now try to make purchase and sale tracking easier for their customers.
Of course, many people switch brokers from time to time, and you clearly won't want to lose valuable purchase and cost-basis data. Storing this kind of information elsewhere, such as in a program like Quicken, 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.)
Meanwhile, if you're interested in having your brokerage reinvest your dividends, you have several options. Schwab
Reinvesting is powerful
Reinvesting dividends can be a powerful way to get wealthy. Here are some eye-opening examples of stocks that have produced huge gains over the years through reinvesting dividends:
Johnson & Johnson
(NYSE:JNJ): $2,000 invested in J&J 30 years ago is now worth more than $140,000.
(NYSE:KO): $2,000 invested in Coke in 1979 is worth more than $135,000 today.
(NYSE:XOM): $2,000 invested three decades ago would now be worth more than $163,000.
(NYSE:WMT): $2,000 in shares in 1979 would now be worth almost $1.1 million.
You can see just how powerful dividends can be -- even without adding a single penny to your original investment. Over time, you'll often find that your dividends grow so large that you'll earn more than your total original investment every year in dividends alone!
Sidestep the accounting
You can neatly sidestep the headache of record-keeping 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.
Reinvesting dividends shows just how powerful long-term investing can be. By keeping your money working for you, you can make it grow that much faster -- getting you where you want to be that much sooner.
Learn more about brokers and how they can help you reach your financial goals:
Check out our broker collection for more information about finding the best broker for dividend reinvestment.
This article was originally published Sept. 24, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Schwab is a Motley Fool Stock Advisor recommendation. Coca-Cola and Wal-Mart are Motley Fool Inside Value recommendations. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor selections. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.