How you can increase your returns by enrolling your stocks in DRIP investing.

How you can increase your returns by enrolling your stocks in DRIP investing.
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Some publicly traded companies pay out a portion of their profits to shareholders in the form of dividends. The company authorizes a payout to all shareholders as of a particular date as a cash payment. If you own those shares in a brokerage account, your account will be credited with cash once the dividends are paid out.

You can leave that cash in the account but oftentimes that cash will earn next to no interest. Alternatively, you can wait until it accumulates enough to buy more shares of that stock or another. But there is another, automated and easier option that is better at putting your money to work right away called: DRIP investing.

What is DRIP investing?

Many companies and ETFs offer a "Dividend Re-Investment Program" or DRIP for short.  Simply put, if you enroll in DRIP (typically you need to enroll for each stock that you purchase within your brokerage account) then when the cash dividend is paid out, instead of receiving the cash - the money will be automatically used to buy more shares of the underlying stock. That allows you to get compounded growth by re-investing the dividend immediately. The really nice part is that you don't even need to have a lot invested to participate as you can purchase fractional shares. If, for example, your dividend payment comes out to be $20, but the share price is $40 at the time of payout, you would be given 0.5 shares so that you can still take advantage of this compounding growth.

Disadvantages are very few. If for whatever reason you prefer the cash to be paid out and not automatically re-invested, then simply turn off the DRIP selection prior to the dividend being paid out. fact that you would otherwise. When it comes time to sell, it may also take a slightly longer amount of time to receive the proceeds of the fractional share (typically one extra business day). You also still need to pay the same taxes that would otherwise be due whether you re-invest or not.

All-in-all, if you are a long-term investor in the stock and still are a believer that the underlying stock is a good investment, it makes a lot of sense to compound your earnings, and automate this part of your investment program by enrolling in DRIP. Another positive aspect of DRIP is that since the additional purchases are timed with each dividend payment, it serves to dollar cost average these investments.