What is Drip Investing?
Drip investing can help the common investor magnify their returns on dividend stocks. This strategy can help every investor out there who is holding onto their stocks for the long term.
Everybody knows what dividend investing is, you simply go out and buy some high dividend paying stocks and hold onto them for the long term. You definitely benefit from the monthly cash flow, but there is a way to increase your return even further.
This very powerful way to increase your long term returns is called drip investing and what it does is simply reinvest your dividends. For instance say you made $20 in dividends one month, well you could always take that $20 and spend it, or you can have it automatically reinvested into the company.
If it is automatically reinvested back into the company then it will be able to multiply and grow into even more dividend producing securities.
Just to give you an idea of how powerful this technique is compared to regular investing let us look at an example. Let us say that you want to invest $1,000 into a stock. The stock pays out a 5% dividend and has an average return of 10% which is around the average stock market return.
If you buy the stock without drip investing it you would have somewhere around $2,963 after 10 years. Also remember that some of that would be from dividends you would have recieved, so you may have already spent some of the money and would actually have a little bit less.
On the other hand had you bought the same stock with the same $1,000 and decided to use a drip investing on your investment you would have $4,045after those same 10 years, and because you haven’t spent any money that would be the full amount in your account.
So if you are willing to hold off on using the extra cash flow and want to reinvest it this strategy can drastically increase your long term gains.
