DRIP stands for “Dividend Re-Investment Program”. Some listed companies have DRIP’s where dividends are automatically re-invested in more shares from that particular company and usually with no associated trading fees.

I have for example over a period of two years turned 100 General Electric shares into 105 shares by having the dividends (minus taxes) automatically re-invested in additional General Electric shares. Those 5 shares now obviously also contribute to the dividends I receive and re-invest. I am using the principle of compound returns to get ever-increasing dividends from General Electric whether they increase their dividends or not. So it is a great way of slowly but surely growing your portfolio if you can’t or don’t make regular cash contributions to your portfolio.Also, as pointed out in my earlier post about dividend investing in general, in a diversified portfolio capital gains alone usually do not make you rich, but re-invested dividends do.

I don’t know about other brokers, but E*Trade, the broker I use for my US shares, offers the ability to enrol any of my dividend-paying shares in a DRIP without me having to pay any trading fees when the dividends are re-invested. This means that my portfolio frequently contains fractions of a share as the dividends never buy whole amounts of shares. That is not a problem; I get dividends on the fractional shares as well.

When I originally planned this post, I was going to mention that regularly re-investing your dividends constitutes a bit of dollar-cost averaging (at the time I thought dollar-cost averaging was a good thing). Since then I have become more knowledgeable and I would claim that re-investing dividends constitutes a regular contribution.

So here is why I like DRIP’s:

• I get my dividends re-invested right away rather than having to wait until I have received enough dividends to make it worthwhile to make a “normal” trade.
• I don’t pay any trading fees
• I use the principle of compound returns directly on the shares that paid out dividends.