Let your cash DRIP into more shares: A guide to dividend reinvestment

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Every drop adds up.

© Andrey Popov/stock.adobe.com

When selecting stocks for your portfolio, do you concentrate on high-potential companies that seek high growth and plow every penny of profit into research and development, technology, and marketing? Or do you look for steady-as-she-goes cash cows that tend to deliver solid earnings each quarter—and pay a portion of it out to shareholders in the form of a dividend?

Maybe the idea of dividends conjures up images of grandparents waiting for quarterly checks and using the money to fund their retirement lifestyle. News flash: Dividends aren’t just for the elderly or those who need steady investment income. And nowadays, high-growth companies such as Apple (AAPL) and Microsoft (MSFT) pay quarterly dividends.

You might receive dividends from stocks, exchange-traded funds (ETFs), or mutual funds (in the form of distributions). If you don’t need the cash, consider reinvesting those dividends into additional shares with a dividend reinvestment plan (DRIP) to make dividend-paying stocks part of a growth strategy.

Want to reinvest your dividends? There are three ways to do it.

Perhaps the most straightforward way to turn your dividend payments into additional shares is through a dividend reinvestment plan (DRIP). DRIPs are frequently offered as part of a direct stock purchase plan, and allow you to buy shares directly from a publicly held company. They are typically administered by a third-party transfer agent, such as Computershare (CMSQY) or Equiniti Group (EQN).

If you happen to work for the company (and it offers a DRIP), enrollment is typically done through your human resources department. But if you’re looking to invest in another company’s DRIP (and not all companies offer them), the best place to start is with their website’s investor relations section. Some companies have a direct link to their stock participation enrollment page; others may place it inside their FAQs tab.

Here’s how it works. Suppose you own 150 shares of Coca-Cola (KO), its shares are trading for $68 per share, and the company just announced a cash dividend of $0.49 per share (which comes to $73.50 for your 150 shares). The company’s transfer agent will buy you one share, plus a fraction of another share, after deducting a small transaction fee.

The following quarter, assuming Coca-Cola pays another $0.49 dividend, you’ll earn it on 151 shares. Each quarterly dividend means more shares in your portfolio. That’s building wealth, incrementally, through the power of compounding.

Do you hold stocks or stock funds (that is, ETFs or mutual funds) in a cash account at a brokerage firm—particularly one with online trading and account access? If so, you don’t need to limit your choices to companies that offer DRIPs. These days, all the top brokers offer automatic dividend reinvestment, similar to that of a company-sponsored DRIP.

There should be a “reinvest dividends” option in your investment account preferences. Once you activate it, your broker will purchase additional shares whenever you earn enough in dividends—most likely the day after the dividend proceeds settle. You may be able to select specific stocks and ETFs for reinvestment or opt to reinvest dividends for your entire portfolio.

Self-directed retirement accounts. If you participate in any self-directed retirement accounts (where you control the investment choices) such as a traditional or Roth IRA, simplified employee pension (SEP), or even a health savings account (HSA) with a high balance, you may have chosen some dividend-paying stocks or funds. If so, make sure the account custodian (bank, broker, or investing platform that holds the account) knows you would like to reinvest dividends.

Company 401(k), 403(b), 457, or similar plan. Company-run retirement plans typically set dividend reinvestment as the default option. It’s all done behind the scenes, usually within the funds themselves, so the only thing you might see is—over time—higher share counts among your selected funds.

Is dividend reinvestment not available at your brokerage firm, or would you rather be your own portfolio manager? There’s never been a better time to reinvest dividends on your own. Commissions have dropped to zero for most stock and ETF purchases, and many brokers even offer fractional share purchases.

The upside for this row-your-own-boat approach is that you can be strategic in your timing (if you so choose). The downside, of course, is that you have to pay attention. Set up notifications and/or alerts for when your stocks and funds declare (and pay) dividends, and be ready to act. Just remember a couple things:

Depending on your stomach for risk and your investing horizon, there may be room in your portfolio for a selection of growth stocks and value stocks. If you like what a company does or makes, and you believe in its ability to deliver long-term returns on your investment, don’t automatically dismiss a dividend payer because you want profits to be plowed back into the company.

Instead, you could take your share of the profits (which is what a dividend is, after all) and plow it back into the company yourself by buying more shares. And if you play your cards right, when it’s time to retire, you might choose to start receiving those dividends as income to fund your lifestyle. 

Specific companies are mentioned in this article for educational purposes only and not as an endorsement.