A “DRIP” is a program you can set up with your broker that allows you to use your dividend payments to buy new shares of the company. It effectively allows an investor to passively build a larger and larger position in a stock without ever having to shell out another dime to buy new shares.
The beauty of a DRIP is that it takes the guesswork out of when to buy more shares. For longer-term investors, we think a DRIP program is one of the best uses of dividends. Our research indicates that re-investing dividends can increase your overall performance by roughly 40% over the course of 10 years. That adds up over time, especially when you consider that if you hold a position long enough, the dividends eventually pay for the initial investment… and then some. Which means you then own the stock for “free.”
It’s not uncommon for longer-term investors who have followed this approach to receive more in dividends than they spent on their initial investment!