DRIPs (Dividend Re-Investment Plans) and cash option plans let individual investors build their wealth. That’s thanks to the dozen advantages that we outline here.
Studies have shown that dividend reinvestment is critical to building wealth. So make use of DRIPs (Dividend Re-Investment Plans). Companies with DRIPs are willing to reinvest your dividends into new shares. You can build wealth even faster with cash option plans. That is, you write a cheque to buy more shares. DRIPs give you a dozen advantages.
1. DRIPs let you buy stocks gradually. Having modest dividends automatically reinvested is easier on the nerves than investing big sums all at once. Particularly during stock market setbacks.
2. DRIPs let you profit from volatile stock markets through ‘dollar-cost averaging’: regularly invest fixed sums and you buy more shares when prices are lower and fewer shares when prices are higher. So you buy your shares at below-average prices.
Eliminate or reduce your trading costs
3. DRIPs in Canada cut brokerage fees. Such is not always the case with American DRIPs.
4. You avoid bid-ask spreads (paying the higher ‘ask’ price and receiving the lower ‘bid’ price).
5. Cash option plans help you resist the risky and futile strategy of ‘market timing’ (trying to buy at the bottom and sell at the top—at the ‘right time’).
6. Most companies and real estate investment trusts with DRIPs are of high quality. In fact, we rate 60 of 68 as either ‘Very Conservative’ or ‘Conservative’.
7. Dividend-payers keep you out of scams. Rising dividends improve your chances of making share price gains. That’s because as more investors seek income, they’re likely to bid up the prices of stocks with rising dividends.
The power of compounding
8. DRIPs give you compounding. As your reinvested dividends buy more shares, your dividends grow exponentially. And all of your dividends work for you. One study found that a dollar invested in the US stock market from 1926 to the millennium grew to $105.96 from capital gains. Reinvest your dividends, however, and that dollar grew to $2,591.79.
9. DRIPs put your dividends to work immediately. This beats letting them sit idly in your account.
10. DRIPs amount to ‘forced’ savings plans: you can’t spend dividends that you don’t receive.
11. The dividend tax credit on Canadian stocks reduces the tax department’s bite. But interest income is fully taxed outside of registered accounts.
12. 30 Canadian investments we cover will reinvest your dividends into new shares at a discount to their market prices. That is, you profit right from the start.
This is an edited version of an article that was originally published for subscribers in the December 14, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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