We explained what a Dividend Reinvestment Plan (DRIP) was previously, but that only scratches the surface. You may still be wondering, “What are the benefits, and is it right for me?”
The significant benefit to DRIP investing comes from compounding interest.
What is compounding interest?
Compounding is when you’re earning interest on interest. This is the ultimate method of making your money work smarter, not harder.
Think of it this way, if you were earning 5% interest annually on an investment of $10,000, your investment would grow to $10,500 at the end of year one. Year two would provide you with a total of $11,025. Within 10 years, that $10,000 would have grown to $15,513.28. This increase shows that you actually end up earning 7.6% interest thanks to compounding interest.
So, already you’re spending less to get more when you invest through a DRIP. Now let’s look at what this larger number of shares means when we think about compounding interest.
The main benefit of DRIP investing is compounding returns. By automatically reinvesting any dividends and buying more shares, an investor’s dividend payouts also increase. Over time, the potential return on this investment increases and the long-term gains grow.
As you buy more shares, the amount of interest you earn increases. This increase in shares means you’re growing your wealth even faster.
Thanks to the power of compounding interest, DRIP investments are one of the most powerful investment strategies. When you couple the power of compounding interest with additional investments, growth happens quickly, and many investors end up living off of their dividend payouts in the end without touching their investment shares. Dividend