The Value of Reinvesting Dividends

Dividends are the lifeblood of any long-term income investor. Buying great companies withgrowing dividend distributions is an age-old strategy employed by some of the greatest investors of all time, including Warren Buffett.

This “snowball” effect of buying a security with a given yield, and watching that yield grow over time as a reflection of the underlying stock’s low cost base and growing dividend is one of the most common strategies used for those looking for retirement income for an indefinite amount of time. For young investors starting out, I contend that buying equities with established histories of growing dividend distributions is one of the smartest ways of growing a snowball over time.

One way investors can re-invest dividends immediately back into the underlying stock is through a dividend reinvestment plan (DRIP). A DRIP is a tool in which investors are able to directly reinvest a dividend into the underlying stock, instead of receiving cash. DRIPs are only available on certain platforms and with certain stocks – restrictions abound, so it is best to speak to an investment professional about which stocks, if any, conform to a DRIP before making any assumptions.

The value of such a program lies with the reduced or eliminated trading costs related to the stock reinvestment, which allows an investor to essentially grow the number of shares owned in a given stock over time without purchasing new stock and incurring trading fees over time.

Personally, I used a DRIP wherever possible – receiving more shares of stocks I hold highly only makes sense to me.