Dividend reinvestment plans, also known as DRIPS, are a simple way to generate long-term wealth. Many companies sell DRIPS directly. Often these plans are at no cost. DRIPS are also available through brokers and companies such as Fidelity and Vanguard.
A dividend reinvestment plan is a strategy where dividends are automatically reinvested into company stock. It’s similar to compounding interest in a savings account. Exponential growth is the result. There is a way to avoid taxes as well.
Why Invest In Dividend Stocks
Dividend stocks generate positive cash. Companies share their profits with shareholders. Most companies pay dividends quarterly. Dividends are a reward for investing money into a specific company.
Many companies offer DRIPS at no cost to the purchaser. Here are five companies that offer no-fee DRIPS.
| Company Name | Ticker | Dividend Yield (Sept 2022) |
| Aflac | AFL | 2.69% |
| Sherwin Williams | SHW | 1.08% |
| Hormel Foods | HRL | 2.27% |
| Illinois Tool Works | ITW | 2.70% |
| Realty Income | O | 4.63% |
Dividend stocks are a form of passive income. Income can be earned from McDonald’s without ever flipping a single burger.
Stockholders should receive a share of the profits each quarter. Some people consider that payment as income. The DRIP strategy reinvests the cash in additional stock.
Who Should Participate In A Dividend Reinvestment Plan
Purchasing individual stocks carries inherent risk. Diversification risk is the primary issue concern. One stock can easily go kaput. Companies such as Enron, Kmart, Blockbuster, MySpace, Palm, and Toys R Us, are out of business or drastically changed. Shareholders lost billions of dollars when Enron went bankrupt.
I have a severe individual stock recommendation. It’s super conservative and minimizes diversification risk. Most families will be unable to follow my recommendation but it will keep your money safe.
I recommend investing in individual stocks only when an employer-sponsored retirement plan (401k) is legally maxed out. The limit for 2022 for a 401(k) and 403(b) is $20,500.
If you have reached that limit in your employer-sponsored plan then feel free to enroll in a DRIP. Of course, if you’re a multi-millionaire do whatever you want.
No Employer-Sponsored Plan
What if an employer-sponsored plan is not offered? The next best option is an IRA. Those limits are much smaller and do not offer a company match. They are still great options.
Diversification risk must be considered when opening an IRA. Individual stocks might be sexier than boring mutual funds or exchange-traded funds but they are significantly riskier.
Open an IRA and invest in a dividend-paying exchange-traded fund. Fidelity offers an option to have dividends reinvested automatically. It’s still a DRIP.
There’s Always Homework
Identifying strong individual stocks can be challenging. Most people don’t budget or balance their checkbooks. Asking them to conduct due diligence on a company is probably a stretch.
Here’s a primer for evaluating individual stocks from Jim over at Investment Soup.
If you’re unwilling or unable to evaluate stocks then stick with mutual and exchange-traded funds.
Dividend Reinvestment Plans — Direct
Opening a DRIP is straightforward. Pull a list of companies that offer dividend reinvestment plans. Select some that interest you from the list. Conduct due diligence and narrow down your list.
Make contact with the company’s investor relation team and find out their requirements. Some companies require a minimum starting purchase. Others require regular electronic transfers of funds on a regular basis.
Pick your companies and enroll.
Keep great records for tax season. Taxes are owed on dividends even if they are reinvested. If you have ten DRIPS with ten companies that could be a tracking nightmare.
A “No Tax” Dividend Reinvestment Plan Option
I am allergic to the Internal Revenue Service. My preference is to stay off of their radar at all times. As such, I only buy stocks inside of a Roth IRA.
I’ve maxed out my employer-sponsored 401(k) (by the grace of God). I now “play” with individual stocks. The due diligence is complete. All of my holdings pay dividends in excess of 3%. They all have a P/E ratio of less than twenty and a few more requirements.
The tax benefit of keeping stocks in my Roth IRA is massive. I am not taxed on the dividends. Taxes are not levied on capital gains either.
I will not pay taxes when I begin making withdrawals from my Roth IRA, either.
The downside? I didn’t get a tax break upfront.
If you want the tax break now then a traditional IRA is another option.
Dividend Reinvestment Plans — Scratch the Itch
I’m currently invested in twenty-eight companies, one ETF, and one REIT. I keep them all balanced equally.
These are all in my Fidelity Roth IRA. I’m not fooling with dozens of companies and passwords.
Just one. I prefer simple financial strategies.
Why not just put more into a mutual or exchange-traded fund? There’s a scratch that I need to itch. This is a safe and structured way for me to do just that.
Can I pick winners? Do I have the emotional intelligence (EQ) to manage my emotions when the sky is falling?
I have a system now I simply need to manage that system with consistency.
It’s nice seeing the dividend income return into my portfolio. Each dollar earned is another dollar for me to practice faithful stewardship.
Pivot
Currently, the market is experiencing severe turmoil and volatility. I know my limitations. If things get sketchy and my Roth is well below the market I will cry, “UNCLE”. I will liquidate my individual stocks and buy a dividend-paying ETF and continue to reinvest dividends into that.
Should Christians Invest in Stocks
Have you ever wondered if Christians should invest in stocks? If so, here’s an article that I wrote about that subject.
Enjoy!