Behold the power of reinvested dividends, which you can tap through "Drips" and elsewhere.
Drips (a term that refers to dividend reinvestment plans, and sometimes direct investing plans, as well) let you reinvest dividends to buy additional shares of stock. Many people might shrug their shoulders at the thought of reinvesting dividends, thinking they might as well just take those few dollars as cash and enjoy them. Wrong!
First, take a few moments to learn about Drips, which permit you to buy small amounts of stock directly from companies, bypassing brokerages and their commissions. (Though some brokerages really don't charge all that much.) One of the best things about Drips is that they allow you to have all dividends reinvested back into company stock, even if the dividends just buy fractions of shares. So, if your 100 shares of Pfizer (NYSE:PFE) pay you a quarterly dividend of $13, you can pick up an additional third of a share instead of spending it on a bad movie. This might not seem like much, but it's actually extremely powerful in the long run.
Consider Ford Motor Co. (NYSE:F). If you bought some shares of it at the end of 1980 and hung on for 18 years to the end of 1998, they would have appreciated nearly 3,900% (22.7% annually). That's amazing enough. 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 and $124,000 with reinvested dividends. (This doesn't even take into account Ford's spinoffs during that period.)
Over the same 18-year period, Pfizer advanced 22.3% annually without reinvestment and 25.3% with it. J.P. Morgan shares grew 12.3% without reinvestment and 17% with. Coca-Cola (NYSE:KO) appreciated 24% without reinvestment and 27% with it. Over a decade or two, these differences can amount to doubling your money.
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 now invest just several hundred dollars at a time through your brokerage without paying too much in commissions. And, just as important, some brokerages now offer dividend reinvestment, too. See whether your brokerage does. (To learn more about brokerages and perhaps find one that better meets your needs, drop by our Broker Center.)
Learn more in our Mutual Fund area, and zero in on our index fund information there. You can learn more about investing in stocks in our Investing Basics area.
