When you sow the seeds with a motive to grow a tree, the fruits you get as output are the result of inputs and patience. The qualitative inputs would always contribute in fresh, juicy and nutritious fruits. The fruits borne by the seeds of monetary investment in shares are known as dividends. It is the reward and return of trusting the company and investing your hard earned money in its valuable capital.
Dividend Reinvestment Plan commonly known as DRIP is an equity investment plan offered by companies wherein the dividends are not paid off in liquid cash but are directly reinvested in underlying equity thereby increasing the holding in shares of the investor. Dividends are used automatically to purchase full shares or in fraction and thus every penny of dividend payout create a growing stake in the underlying company.
The companies go through many ups and downs but still are strong enough to earn huge profits and give away a large chunk of their earnings to the shareholders. Dividend income is that kind of income which is fluctuating but regular. The steady returns on any investment are due to miracle of compounding. The return from dividends is reinvested and the shares eventually grow with a principle of compounding.
Strategies that can give an extra boost to your DRIP investments are:
- KEEPING A VIGIL EYE: before choosing a company in which you want to invest, you need to make yourself familiar with it (you can’t invest your money in a wrong or less paying resource!). The trading history of stocks would help you in having a foresight of the performance of its share. This would help you in owning stocks of only those companies that raise the dividends constantly every year. It would lead to appreciation of value of investments.
- DIVIDEND STRIPPING: It is the strategy which suggests buying the shares at ex-dividend rate. Buying the shares before the announcement of dividend would make your shares qualify for the upcoming dividend. This is quite lucrative strategy as the dividend payouts are huge in the short period.
- BUY SHARES IN PAIRS: In the investment field it is important to understand the importance of time. We do say Time is money and it actually is! If you are willing to buy 6 shares of the company then buy them in pairs of 2, one pair each month. This is because the company comes up with dividend reinvestment option on shares bought in particular time period. If you would have your holding in couple of months then there are very minute chances that you would miss this dividend growth investing option.
- BUY-WRITE OPTION: If the share is on the declining side then along with holding the share the call option can be written to provide extra income to an investor and to minimize the downside risk.
MORE SHARES MEANS MORE DIVIDEND
If your dividend income is reinvested and you get shares in return then you would be having more shares in your account. So the next time when company will declare the dividend then your shares would qualify and you would get more dividends!
So if you want to build your wealth (wealth is built gradually!) slow and steady then DRIP is a perfect scheme to get rich eventually.