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Dividend reinvestment plans are a great way to build a stock or mutual fund portfolio with a small amount of money. They also force you to save money you might otherwise spend. Dividends are a portion of a company’s earnings that a company may pay out to shareholders.
Not all companies pay dividends. But if you are considering investing in one that does so that you can participate in a dividend reinvestment plan, you should look at the company’s dividend yield. To calculate the dividend yield, you divide the yearly dividend by the price of each share of stock.
A share of stock that costs $50 to buy and pays out $1 per year in dividends, has an annual dividend yield of two percent
If you own ten shares of that company’s stock, you’ll make a grand total of $10 per year. Instead of spending that $10, you should sign up for the company’s dividend reinvestment plan. By signing up for a dividend reinvestment plan, you invest small dividend checks instead of frittering them away. Each share you accumulate pays more dividends and increases the amount of stock you own, much like compounded interest.
With dividend reinvestment, you need to own one or more shares to get started. You’ll typically need to make your initial purchase of stock through a broker. Some companies permit you, however, to enroll directly in the company’s dividend reinvestment plan, even if you don’t own any shares. Almost all plans allow you to send a small or large check to buy more shares.
As you reinvest dividends, make sure you keep thorough records. When you sell those shares someday, you’ll need to know what price you paid for each share. This is necessary to calculate your gains and losses for tax purposes.
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