Welcome to Better Have My Money, my Monday night newsletter about stocks, investing and figuring out how to not not be rich.
So we’ve talked many times about the benefits of compound interest (sexy!) and how the most critical thing for building up money is literally just…. time (ironically one of the few things money can’t buy, but that’s not the point of this newsletter).
Today I want to talk about dividends. Which might sound boring but it is free money and is free money boring? No, no it is not.
If perhaps your brain has just temporarily forgotten what a dividend is, a dividend is what you call when companies pay a regular amount, usually quarterly, of their profits back to investors in small payments.
Not all companies pay dividends — it’s usually big safe companies that have been around a long time and have significant profits, and they choose to give some of that cash to shareholders.
Like a little tip of the hat to you.
Of my stocks only a few of them pay out dividends: Nike (NIKE), Starbucks (SBUX), Apple (APPL), Match (MTCH) and Estée Lauder (EL).
I’m talking really just a few cents — my single Nike share earned me a swoosh of 22c last quarter. Starbucks, where I have a grande portfolio of five shares, pays me $1.80 every quarter. Match paid me out $12 last December — $2 per share — making it worthy of swiping right (OK I will stop).
But obviously the more you own, the higher your dividends are, and many people end up living off their dividends in retirement (or using it as supplementary income).
What I want to talk about is what to do with the dividends you get, no matter how small they are.
Cause basically you’ve got two options: either you reinvest it back into the same stock using a reinvestment program or receive them as a cash payment.
This is where you need to learn about DRIP.
Confusing term of the week: “DRIP” — DRIP stands for a dividend reinvestment program. You usually have to sign up separately within your broker (meaning whatever account you use to buy shares) for DRIP, but what it does is reinvest your dividend back into the stock of the company that you got the dividend from, rather than giving you a cash payment.
Meaning it gives you a tiny percentage of stock in the company (usually dividends are just a few percent), and increases your overall investment.
After signing up for DRIP with Ally Bank a few months and receiving two quarterly Estée Lauder dividends, my 5 stocks have grown to 5.026 stocks.
Compound interest in dividend form!
Robinhood does not have a DRIP program. Instead, it just deposits the dividends into your account so that you can either transfer it out and buy yourself something pretty or (and I would advise this second option if you’re a younger investor) you can just leave it in your account and use it to buy more stock in any company.
Robinhood does have zero fees though, so balance out what is more important to you: reinvesting your dividends or being able to easily buy a share here and there without worrying about fees.
Acorns also has a DRIP program (I’m using Robinhood, Ally and Acorns as examples as I use all three of these brokerage accounts).
Is it better to reinvest your dividends through a DRIP program or just use your cash dividends as some bonus money?
It’s really, truly up to you: and what your goals are.
If you want to just grab those extra few dollars as treat money or as more money to invest in a growth stock, then maybe don’t bother with a DRIP.
Remember that your cash dividends are taxable (although mine are so tiny I paid no tax).
If you want to keep your stocks for a really, really long time, then maybe it’s better to enroll in a DRIP and have them continue to work and grow and perform so over time your portfolio increases.
Speaking of a long time, it’s been 50 years since the Stonewall Riots, the birthplace of the LGBTQ rights movement. May I suggest donating some money to the Stonewall Foundation as part of your Pride celebrations this year?
Have a glorious week,
Better Have My Money is on Twitter @bhavemymoney, so please tweet nice things (aka the link to our sign up page) and tag us. Got a mate who also maybe is slightly confused about a dividend? Forward this onto them and tell them to subscribe. If you sign up to Acorns, use my sign up code to join and we both get $5.
As always, if you've got any questions about stocks, this is a shame free zone. Just reply and ask away.