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At
one time or another, you probably wished
you could increase your investments, if
only you had the money. And it is
certainly true that investing can be
expensive. However, you might be able to
get more bang for your buck and
significantly increase your holdings by
buying shares of dividend paying stocks
and reinvesting the dividends into the
same stocks.
To follow this strategy, of
course, you have to find stocks that
regularly pay dividends. Fortunately, by
doing a little research, you can indeed
locate companies that have long
histories of not only paying, but also
increasing, their dividends. (Keep in
mind, though, that stocks are not
fixed-income vehicles, and dividends can
be increased, decreased or totally
eliminated at any point without notice,
no matter how good their track record
has been.)
If you are interested in
reinvesting dividends, you might want to
look for companies that offer automatic
dividend reinvestment plans, also known
as DRIPs. You do not have to receive
enormous dividends to participate,
either; many DRIPs allow you to send in
as little as $10 to $50 at a time to buy
additional shares of stock.
The biggest benefit of DRIPs,
of course, is the ability they give you
to increase the shares of stock you own.
But there are other advantages, too.
Investment discipline.
To be a successful investor, you need
the discipline to continuously invest,
month after month, year after year, in
good markets and bad. Many people lack
this discipline and take time out from
investing until they feel they can
really afford it. But, as you know, we
can all find other ways to spend money,
and investing is often tossed aside for
what appear to be more pressing needs.
However, by taking part in DRIPs, you
will invest steadily, and with virtually
no effort on your part. And since you
never received the dividend checks in
the first place, you won't really miss
the money. Remember, though, that a
systematic investment plan does not
guarantee a profit and does not protect
against loss in declining markets. It
involves continuous investment in the
security regardless of the price of the
security. You should continue your
ability to invest through periods of low
price levels.
Tax benefits. Until
the laws changed a few years ago,
dividends were taxed at your current
income tax rate. Now however, dividends
are taxed at a maximum rate of 15
percent. (This rate is set to expire at
the end of 2008, barring congressional
action.) But even this new, relatively
low rate can lead to a hefty tax bill
for you if you receive a great deal of
dividends. Consequently, if you
participate in several DRIPs, you might
want to keep some of your stocks in a
tax-deferred vehicle, such as an IRA.
DRIPs for the long run.
Ideally, to use a DRIP, you want to
find stocks that offer attractive
current yields and growth potential, and
you want to keep adding shares of these
stocks for a long time. Fortunately, you
should not find the task too hard,
because the companies that regularly
increase dividends are generally
high-quality businesses that actively
try to reward their investors.
Work with a financial
professional to identify these stocks,
turn on the faucet and let the DRIPs
begin. |
