Investing with Dividend Reinvestment Plans

One of the best tools you can use as a dividend investor is to take advantage of dividend reinvestment plans. These plans, also known as a DRIP, can be setup with most online discount brokers or sometimes directly with the company on a direct stock purchase. They are simple to use and setup and can be thought of like a direct deposit of your paycheck into your bank account.

A DRIP is defined as an option to reinvest earnings payout directly back into the company. In other words, instead of receiving quarterly dividend cash payments, these plans will automatically take your cash distribution and reinvest them back into more shares of the stock. Taxes are still required to be paid annually for ones dividend or portfolio income as earnings.

There are two popular types of dividend reinvestment plans that you can participate in.

1. Broker Plan - Check with your online discount broker to see if they have direct reinvestment plan options available to use. If you are long term in a stock, then why not just reinvest your cash payments back into the stock. Think of it as a form of compounding interest. Most brokers do not charge you any commission for stock reinvestment from these plans.
2. Company Sponsored - Several companies offer DRIPS to their investors if you purchase stock directly from them. These types of plans are a little more complicated to setup, as you are dealing directly with the company and not the online stock broker. Regardless, if you are interested in owning part of a company and they offer direct reinvestment options, then you should consider it.

Either option can work to your favor when investing in the stock market. It is important to take advantage of this free service from your broker, provided they offer it. You will not only save money, but will also build a solid portfolio that will return portfolio income for some time.

Using divireinvestment plans on your highest dividend paying stocks can help you build wealth over time. Once you have setup this income stream, you can let it continually reinvest cash dividend payments and watch your income grow. Investing in dividend producing stocks takes time and is not an overnight get rich quick opportunity. It requires patience, as well as periodic checkups of the health of your stocks and the overall economy.

Longer term investing in quality dividend producing stocks makes for a sound income stream that has the ability to pay you over and over again. Combine that with the option of having your cash automatically reinvested back into the asset adn you are talking some significant savings.