Understanding the Dividend Reinvestment Plan (DRIP) can help you make the most of your capital and help you earn money from the cash you receive to increase your overall wealth.
The DRIP is a way for you to reinvest the cash dividends you receive and purchase additional shares of the company that paid you the dividends.
Setting up a DRIP for a stock or an exchange-traded fund makes any cash you earn through dividends to go back into buying more units of that asset, increasing your income through further dividends and even more shares under your name.
Reinvesting dividends is an essential part of my strategy to become a successful investor.
One of the reasons why I find Questrade an exciting option for a discount broker is because it offers you the option of signing up for the Questrade DRIP. If you are an investor in search of income and want to put passive income to make more money, the right DRIP can work wonders for your financial goals.
I am going to discuss how the Questrade DRIP works so you can determine whether or not this plan might make Questrade your choice for an ideal discount broker.
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Setting Up Your Questrade DRIP
If you already use Questrade, signing up for Questrade’s DRIP is a straightforward process that requires four steps:
- If you don’t have a Questrade account, sign up here for $50 in free trades.
- Fill out this form
- Print the form so you can sign it and add a date
- Scan or take a high-quality image of the form and upload it to your account or email it to firstname.lastname@example.org
- Log in to your account to see whether your stocks have been enrolled for Questrade DRIP.
Note that Questrade DRIP offers you a few advantages as well. Signing up to the reinvestment plan incurs no fees or transaction charges. You can add almost all of the stocks and ETFs to the plan. If you ever decide to sell your investment, Questrade automatically cancels the DRIP. If you do not want to continue the DRIP, you can simply contact Questrade to cancel it without selling your investment.
When Should You Reinvest Dividends?
You might not have considered using your dividends to earn more income. While reinvesting dividends might be an attractive option for many investors to increase their income, you might not find it a suitable option.
Reinvesting Your Dividends
You can manually reinvest your dividend income to purchase more shares of the stock or ETF. Instead of taking the cash, you use it to buy more shares of the stock or ETF, and that allows you to earn more money. The result is an overhaul for your long-term returns on the initial investment.
When you are satisfied with the overall income you are earning by reinvesting your dividends, you can stop to and take the dividends as cash.
Benefits of DRIP
It is perfectly valid to wonder why you should sign up for a dividend reinvestment plan when you can reinvest the dividends yourself.
Let’s take a look at why using a DRIP can be beneficial for your financial plans as opposed to doing it yourself:
- Value for Money: With a dividend reinvestment plan, you do not need to worry about owing any commissions to your brokerage for the transactions for buying additional shares. DRIP also purchases shares for you at a discount.
- Zero Fuss: The reinvestment is an automatic process. Once you set it up, the brokerage buys additional shares of the stock without you having to lift a finger.
- Flexibility: While you cannot typically purchase fractional shares, setting up the Questrade DRIP allows you to do that.
- Consistency: Each time you receive dividends from the stock or ETF, you get new shares, consistently increasing your wealth over time.
I think that one of the crucial advantages of enrolling in Questrade DRIP is that you can grow your wealth quietly. You can set it up and forget about it. While you will not see any usable income for the duration of your investment, DRIP will substantially grow your overall wealth until you decide to use your investment to supplement your capital.
Capital Growth Through Dividend Reinvestment
Let’s consider a small example of reinvesting your dividend income. You purchase the stock of X company that pays dividends at $0.50 per share. Let’s consider that the stock increases in value by 10% each year, and it increases its dividend payouts by $0.05 per share.
If you invest $20,000 in the stock with a share price of $20, you will own 1,000 shares of the stock. The dividend income from the first year of your investment will be $500 for 1,000 shares.
In the second year, the share price is $22.00. With the $500 dividends, you bought 22.73 more shares of the company for its new price, and you earn dividends of $0.55 for 1,022.73 shares with the updated payout. By the end of the second year, your dividend income will be $562.50.
By the end of three years of your initial investment, you will own 1,069.55 shares of X stock. That puts the value of your initial $20,000 at $28,471 – a profit of $8,471 in just three years. The longer you keep reinvesting your dividends, the faster the rate of growth of your wealth will be.
Of course, this is an ideal scenario where the income-generating asset continues to thrive, and it continues to pay you dividends reliably. The stock market is not as stable in reality, and the numbers can move up and down. However, the overall returns through compounding can be more substantial than through holding cash.
Should You Reinvest Dividends?
So, when should you reinvest your dividends?
I think several situations can make it more viable for you to enroll for Questrade DRIP and begin reinvesting your dividends:
- Retirement Planning: Investing in DRIP is ideal for retirement planning and other long-term financial goals. It can help you accrue massive wealth in the long run so you can save more than enough for a comfortable retirement fund.
- Speeding Up Compounding: Many investors choose to diversify their investments by using their dividends to buy shares of companies at a low price during market volatility. It can end up with them losing potential gains through compounding. DRIP allows you to speed up your wealth growth without giving in to the temptation of trying to time the market.
- When You Are Not Investment Savvy: Let’s face it. We’re no Warren Buffett. Knowing when to buy or sell stocks is not something everybody can do. DRIP relieves you from having to reinvest your dividends yourself without risking your capital in stocks that might not turn a profit.
- You Want to Grow Wealth Without a Fuss: While some investors might feel inclined to be more hands-on with their approach to investing, others might feel more inclined to let their money grow without having to worry about it.
If you want to unlock the power of compounding to increase your wealth, I think reinvesting your dividends is a great strategy. Through Questrade DRIP, you can reinvest your dividends without having to worry about it yourself. If you want to learn more about Questrade, you can read my Questrade review for a more detailed look at the discount broker.