Drip Investing
Drip investing can help the common investor magnify their returns on dividend stocks. It is something that can help nearly every single long term investor improve their performance.
Everybody knows what dividend investing is, you simply go out and buy some great dividend paying stocks and then 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 powerful way to increase your returns is called drip investing and what it is is simply a dividend reinvestment plan. For example if you made $15 off of dividends in one month, you could choose to spend that $15, or you could have it be automatically reinvested back in 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 this technique can work so well when compared to simply buying and holding here is one example. Let us say that you want to invest $1,000 into a stock. The stock has a dividend of 5% and has an average annual return of 10% which is about the yearly average stock market return.
If you just buy the stock without doing any kind of drip investing on it you would have about $2,963 after 10 years of investing. 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 if you had bought the same stock with the same $1,000 and held it during the same time period, but you decided to use reinvest the dividends on it you would have $4,045 after those same 10 years, and because you have not spent any money that would be the full amount that is 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.
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