Why would someone want to start dividend reinvesting, and how do they make money with DRIPs?
DRIPping isn't for everyone, and as such each investor involved in DRIPs usually has a
unique answer based on their investment objectives but here are some common themes.
COSTS: Investors looking to keep costs as low as possible are often drawn to Dividend Reinvestment Plans & Share Purchase Plans since no recurring costs are involved. Once you have established yourself in a free Share Purchase Plan, your costs are usually only a couple stamps per year to mail off your optional cash purchases. By keeping costs low, means more of your money is invested and in turn making you money. SIMPLICITY: To a new-comer to DRIPping it may seem hard to understand the process, but once involved the plans are pretty much on auto-pilot. The investor keeps things simple by regularly writing cheques to buy more shares to grow their holdings. Regular equal purchases take advantage of Dollar-Cost-Averaging rather than trying to time ups and downs in the market. TAX EFFICIENCY: Currently, for the average Canadian (earning less than $75000/Yr), dividend income is the least taxed form of income outside of an RRSP. Due to the 2008 Federal Budget, changes will be occurring over the next 4 years to the Dividend Tax Credit and as such slightly reducing its preferential treatment. Read more here.
DIVIDENDS AS RETURNS AND INCOME: By choosing companies who consistently pay and raise their dividend over the long period of time, investors have a sure-fire way to improve their returns. The day-to-day and year-to-year gains of a share price become less the focus over dividends. The power of compounding is the magic behind DRIPs and choosing companies who regularly increase their dividend.
Finally, when the investor wants, they can stop DRIPping and start being paid cash directly, which theoretically could be for LIFE!
DIRECT OWNERSHIP: This really isn't a way to increase your returns, but rather a way to feel more in tune with your investments and building of wealth. An investor becomes a direct owner in a particular business, by way of being a shareholder so their interest and attention is more focused. Similar to when a homeowner buys their first home and they start doing repairs and improvements. There is pride gained as the investor is in charge of of their investment decisions.