A Note From Andy: I wrote to you last week about a couple of ways to build long-term wealth. Many readers dropped me a note asking for more details about DRIPs. Instead of hearing from me on the subject, why not tap our grand Connections to hear from the absolute best-in-class expert on the subject?
Marc Lichtenfeld is first and foremost my good friend. After that, though, he’s the Chief Income Strategist for The Oxford Club. When it comes to dividends and the secrets to getting rich off them… I know of nobody better.
Take a look at what he’s written below.
A dividend reinvestment plan (DRIP) could be the best thing that ever happened to an investor.
It’s one of the most reliable creators of long-term wealth I’ve ever seen.
Set it. Forget it. Get rich.
It’s that easy.
Let me show you how it works.
When an investor buys a dividend-paying stock and enrolls in its DRIP, dividend payouts are automatically reinvested in the stock as soon as they’re paid.
So if you own 100 shares of company X, currently trading at $40 per share, and you receive $100 in dividends ($1 per share), the cash automatically buys 2.5 shares of stock.
You now have 102.5 shares.
Next quarter, if the dividend stays the same, you’ll receive another $102.50.
That cash will automatically purchase even more shares… and so on… and so on.
The magic of compounding starts off small… but with enough time, it generates a huge amount of money. It’s like a train that pulls out of the station slowly, then gains momentum and races down the track.
Eventually, that once-sluggish train will take miles to stop.
In my book Get Rich with Dividends, I use a table to show, quarter by quarter, exactly how much wealth is created over time.
I’ve reproduced a portion of it for you here.
In the table, I assume the investor bought 1,000 shares of a $10 stock that pays a dividend of $0.10 per share per quarter (which equals a yield of 4%).
And here’s the wonderful part… In this example, the stock price never changes – and our imaginary investor still makes out like a bandit.
You can see that after three years, the investor’s original $10,000 has turned into $11,271.
Not bad for a stock that didn’t move.
But it gets better… much better.
Look what happens if the investor stays put for just 10 years.
After a decade, he’s generated a return of 83.8%.
He didn’t need to do a thing… not a single buy or sell transaction.
And the stock didn’t budge by a penny.
Think about that for a minute…
The investor received a return of more than 83% on a stock with a price that stayed flat.
How to Reinvest Dividends
The best part about reinvesting dividends is that it’s easy and free (in most cases). The simplest and cheapest way is to enroll your dividend-paying stocks in a DRIP with your broker.
Most brokers offer the plans for free.
All you do is call them and tell them you want your dividend payers enrolled in a DRIP. That’s it. Each time you get a payout, it’ll automatically buy more shares of stock.
Many companies offer DRIP programs of their own. However, most of them charge for the privilege. Often, you have to pay a fee to set up the account and then pay a fee every time you reinvest a dividend.
In almost every situation, I recommend handling your DRIP through your broker. It’s nearly always cheaper and much more convenient to have all of your stocks in one place rather than having to keep tabs on DRIP accounts for each individual stock.
Reinvesting dividends is the easiest way to grow your wealth over the long term. It’s a conservative strategy, especially when the investor owns stable companies that grow their dividends every year.
Best of all, it’s a strategy that has withstood the test of time.
It has proven over and over again that the longer you stick with it, the more you make.
After a few years, that slow-moving train you thought would never get started becomes an unstoppable behemoth loaded with wealth.
[Editor’s Note: Marc’s work is changing lives. One paralyzed vet recently wrote him and said, “Marc and The Oxford Club have given me back a sense of purpose and value in my life, allowing me to provide for my family and gain back some pride again.” That’s huge. It proves that money equals Liberty. Notes like this are all thanks to the 100% dividend tip that Marc has graciously shared with the world. If you want to learn a way to create an income stream that doubles your money each year… click here now.]