IFB04: Why DRIP Investing Your Stocks Should be Integral to Your Investing

DRIP investing is one of the untapped resources to investors. It can be one of the keys to growing your wealth. Compounding is one of the eight wonders of the world, according to Albert Einstein. Utilizing it with DRIP investing is a great way to double compound your investments. We will discuss this and much more in today’s session.

* How the DRIP works and how it can benefit you


* Differences between the Roth IRA and Traditional IRA


* Tracking your Brokerage Account


* Portfolio Diversification and limits on total number of stocks invested in


* How do Bonds work?


* What is the best Asset Allocation for my portfolio?

Welcome to Investing for Beginners show notes for Session 04 with Erin. Today we spoke with Erin who is just starting out and recently became a subscriber to Andrew’s eletter. This letter has helped her find a few companies to start investing in, but Erin has several awesome questions for us today.
Let’s dive in to find some answers for her.
How does the automatic DRIP work?
Andrew: Yeah, so this is a very, very key thing to understand. And really a lot of investors, even professionals don’t really comprehend this idea. Or they don’t care to apply it. But it can be so powerful.
It’s one of those things that makes long-term investing so attractive.
So one of the ways that I will try to describe it is this way. Imagine you have a room in your house. Within that room you have a long row of coffee makers. And what those coffee makers do is they drip down into a big vat that you might have. And the vat has a tube that feeds back into one of the coffee makers.
So you buy your first stock, that’s like activating your first coffee maker. And the stock will drip down. And that drip will feed back into back into a second coffee maker. Then the second coffee maker will also start to drip, but it is not going to be as big as the first coffee maker. But it will have that drip going. If you look at the first coffee maker, that drip is slowly getting bigger and bigger.
Now as those drips continue to accumulate, you will see that the second drip is also getting bigger and that contributes to the whole pot. Eventually you will get the second coffee maker to drip just like the first coffee maker.
That is when the two will shift to a third coffee maker. And as you can see as that keeps going and the drips get bigger, bigger and bigger. The accumulation of coffee makers that are able to work will get faster and faster. It basically compounds from there.
In the story, the coffee maker is the first stock we bought. And then as you reinvest the dividends, which is the DRIP. That is like the tube part of the reinvestment.
So basically, any dividends or income that you are receiving from a stock allows you to buy more stock. Those additional shares, even if they are fractional shares will start to accumulate more shares.
Companies that pay dividends, one of their biggest goals is to make those dividend payments increase every year. So that is why I said earlier that the DRIP slowly gets bigger and bigger. Which over time can really become a big DRIP because as the dividend payment grows you’re getting more of an income. And then you might be able to buy even more shares from that.
So what you are trying to do with DRIPs in your investment account is trying to put it on automatic.
Number one when you do tell your broker, we both use TradeKing. All you have to do is give them a phone call. Every stock that I buy they automatically set up a DRIP for me.