How To Supercharge Your Dividend Investment Returns

For the dividend-focused investor, a dividend reinvestment plan can supercharge returns over time. Traditionally the way to reinvest individual stock dividends was through a company sponsored dividend reinvestment plan, commonly called a Drip. However, for several reasons over the past couple of decades the efficiencies and usefulness of Drips have faded. Fortunately, you can now more easily than ever have a dividend reinvestment plan that offers more flexibility and actually costs less in fees and commissions.

The Way It Was

When I first developed a serious interest in stocks in the early 1980’s, many dividend paying blue chip companies and REITs offered Drip plans that allowed investors to set up regular investment plans that required only modest amounts of money, but upfront and ongoing. At that time, many if not most companies that offered Drips absorbed the administration costs, providing a no-commission way to accumulate company shares. Drips allowed investors to get started in individual stocks with almost any amount of money and they could add at any time by mailing in a check. There were enough free Drip plans available that a portfolio of a half-dozen or more stocks could be owned and shares accumulated with dollar cost averaging and dividend reinvestment.

This went on during the 1980’s and well into the 1990’s before online discount brokerage accounts. Schwab launched its online trading platform in 1995. Before online accounts became common, even discount brokers charged $50 and up on commissions to buy and sell stock. Full services brokerage commission rates were measured in $100’s. For an investor who was something less than rich, Drip plans were the way to go to build a portfolio of blue-chip, dividend-paying stocks.

The Way It Is Now

In general, individual companies are no longer interested in absorbing the administrative costs of Drip plans. Small, individual investors are less important to these companies than they were two or three decades ago. As a result, most Drip plans are loaded with fees. There will be a fee to set up an account, often a fee for every additional investment, and pretty steep charges (more than your average broker commission) if you want to sell shares. If a plan allows no charge added investments, the no-cost option will only apply to deposits you have set up as automatic direct deposits from your bank account. If you want to mail in a check to invest, there will be a hefty charge to put that money to work. The modern Drip can easily suck away in fees a hefty percentage out of the money you send in to invest.

If you want to set up a no or low-cost traditional Drip portfolio, you will need to comb through hundreds of plans from different companies. Also, if cost is a factor, you may end up investing in mediocre stocks to save on fees, rather than searching out those companies with the best income potential.

On the discount brokerage side, most brokers now let you elect to have dividends reinvested into individual stocks without a commission charge. Also, with stock trading commissions in the $5 to $8 range, a position in a stock can be established with just a few hundred dollars. If you put $500 into a stock with a $5 commission, you incur just a 1% expense to invest in that company. With $2,000 to $3,000 you can start to build a diversified income portfolio. If you have a larger portfolio, the costs fall to just a small fraction of one percent.