Among the questions that readers have asked us about Drips: "I see that Drips let you reinvest dividends to buy additional shares of stock. What's the big deal about reinvesting dividends? Why not just take those few dollars as cash and enjoy them?" Here are some answers.
One of Drips' best features is their ability to reinvest your dividends back into company stock, even if the dividends just buy fractions of shares. So if your 100 shares of Motley Fool Inside Value pick Pfizer
But get this -- if you'd been reinvesting dividends to purchase more shares, your total return would skyrocket to 12,300%, or 30.7% per year! An initial $1,000 investment would have grown to $39,000 without reinvesting dividends, but a whopping $124,000 with reinvested dividends. (This doesn't even take into account Ford's spin-offs during that period.)
Over the same 18-year period, Pfizer advanced 22.3% annually without reinvestment, and 25.3% with it. Shares of Motley Fool Income Investor pick JPMorgan Chase
With discount broker commissions recently falling into the single digits, it's now become possible to gradually accumulate shares of a company without using a formal Drip plan. You can invest just several hundred dollars at a time through your brokerage without paying too much in commissions. Just as importantly, some brokerages now offer dividend reinvestment, too. See if your brokerage does. (To learn more about brokerages, and perhaps find one that better meets your needs, drop by our Broker Center.)
This article was originally prepared back in the 1990s -- that's where the text above originated. Do you notice anything interesting about the companies mentioned? That's right -- some of them have fallen on hard times recently (Ford, for example, even reduced its dividend.) Others have suffered from stagnant stock prices, or just don't have the support of much of the stock market. That's why it's important to select your dividend-payers (and any stock, for that matter) carefully. A big name is never enough.
If you're interested in finding some stocks that pay hefty dividends and sport healthy prospects, take advantage of a free trial of our Motley Fool Income Investor newsletter. It'll let you peek at a long list of dividend payers recommended by our Fool analyst Mathew Emmert.
Learn more in these Mathew Emmert articles: