DRiP stands for Dividend Re-investment Plan. It’s a powerful investment strategy as it allows you to leverage two investment principals: ‘Compound Growth‘ & ‘Dollar Cost Averaging‘.
It is usually associated with Stock, ETFs and Mutual Funds as they can all pay dividends and it can be re-invested at the market price. Many discount brokers support DRiP without any transaction fees. Contact your discount brokers for more details. Some discount brokers go a step forward and provide the Dividend Re-Investment Plan discounts offered by the companies. See the Canadian DRiP List for details on the available discounts in my resources page. The discount can provide an added benefit to the Dollar Cost Averaging.
- RioCan pays $0.115 cents monthly in dividend for a yield of 7.26% and it compounds monthly.
- 7.26% interest paid annually and compounded annually. (This is hardly impossible to find at the moment.)
Dollar Cost Averaging
This concept allows you to average your cost throughout the markets. There are always up and downs and being able to do Dollar Cost Averaging, you can mitigate your cost. Mutual Funds leverage this concept by allowing investors to buy funds for small amounts at a time thus allowing investors to buy regularly and averaging their price on a weekly, bi-weekly or monthly basis. This concept can also be leverage with DRiPing. If you have Stock or ETFs, the dividends are either paid monthly or quaterly, if you re-invest your dividend, you can average your price on a monthly or quaterly basis.
In the table above, you can see that every month, the shares bought from the dividend contribute to averaging your price. At any point, you can average your price by buying more shares but this way is automated. Buying regularly allows you to leverage the down times in the market and not just buy when it’s going up.