How Can DRIPs Help You Build Wealth? - Canadian Finance Blog

One of the best ways to improve your financial future is to put your money to work by investing. And one of the interesting options you have for building wealth through investing is with the use of dividend paying investments, including DRIPs.

What are DRIPs?

A dividend reinvestment plan (DRIP) is a way of investing automatically in dividend stocks. When you invest in dividend stocks, you receive a portion of the profits as a payout. The payout can be given to you straight, or it can be used to reinvest in the stock. A DRIP, instead of sending a cash payout to you, automatically takes your dividend and buys more stock with it.

So, if you have 100 shares of a company that pays 15 cents quarterly, you receive $15 each quarter. You can either choose to have that money sent to you, or you participate in a DRIP, and the money will automatically buy more stock. If the shares cost $30 apiece, your $15 will buy 1/2 a share. Over time, your extra shares add up, and you end up with more shares ? and higher dividend payments.

DRIPs and Building Wealth

Because of the way DRIPs work, they can help you build wealth at an accelerated rate. Your portfolio grows at a faster rate because you regularly add more shares. As you add shares, you receive higher dividend payouts, since your payouts are based on the number of shares you own. The higher payouts allow you to automatically receive more shares ? and so on. You can see how the cycle can help you grow your portfolio.

Later, you can take advantage of this. When you are ready retire, you will have more shares that you can sell at a (hopefully) higher price. Another option is to use the dividend portfolio as a source of income. Building an income portfolio is a goal for many, but it is also a time-consuming task ? especially if you don?t have a large chunk of capital. A DRIP can help you speed up the process a bit, adding more shares to your portfolio so that you can see more income down the road.

With the help of DRIPs, it?s possible to boost your wealth potential.

Risks of using a DRIP

Of course, with all investments there are risks. The biggest risk, of course, is a loss of capital. When you invest in anything, you can lose out, since there is no guarantee that the share price will keep rising. While you might continue to receive the dividend income, you could lose some of your capital during a stock market crash, or if something changes fundamentally about the stocks in your dividend/DRIP portfolio. When you are ready to cash in all those shares, you might find that they aren?t worth as much as you had depended on.

Before you invest in anything, make sure that you do your research. There are a number of solid dividend paying stocks out there, and good companies that offer DRIPs. Look for those that are most likely to help you reach your goals, and always be mindful of the risks involved.

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