DRP drip your way to riches

Investing can be tricky, daunting and just plain hard. In many cases the struggle doesn't end when you finally buy an investment, because then you need to manage it. You watch the value of stocks, make sure rentals have a good tenant and deal with the constantly changing value and cashflow.

One way to get the most out of your investments with minimal effort is with a Dividend Reinvestment Plan (DRP)

When I was working in a fast food store, and studying at university I wanted to buy an investment property (over achiever!), but I didn't have the money or the income. Instead I sat down and started buying investment bonds. My first purchase was Primary Healthcare Limited (ASX code: PRY) . For $2,000 I bought 20 Bonds, which at the time were returning more than 7% p/a.

I held these for a little over three years, where they paid dividends quarterly like clockwork before the bonds were redeemed and my initial investment returned. In three years I made $420. As my first investing venture this was pretty amazing! In those three years I bought Bonds with other companies, and ended up with a portfolio of $20,000.

This would be a great success story. Except... I have no idea what happened to those dividends.

The final resting place of the under-utilised dividends

While I've moved away from Bonds and into investing through Vanguard, RateSetter and Acorns, I once has a collection of bonds paying roughly $200 quarter. As a less than 20 year old, this is an amazing amount of money being brought in from a completely passive investment. However, I didn't reinvest it, and it never grew. 

Payments were made quarterly into my bank account and absorbed into my every day spending. The problem with corporate bonds such as the ones I was investing in is that they have no automated reinvestment schemes - the only option for dividends is to have them paid directly into your bank account.

While it's wonderful seeing money come into you account every three months, it's hard to partition out such small amounts.

Dividend Reinvestment Plans

When investigating new investment now, I have a few things I check, but one absolute necessity is stress free reinvestment. I don't have the time or energy to watch my investments and make sure that when I am paid $11.17 (or some other obscure amount) that I portion out that money into a new investment. It's far too easy for that money to disappear into my every day spending, and it's really hard to find an investment that let's you make such small contributions.

The majority of stocks that pay dividends allow you to enroll in a Dividend Reinvestment Plan - commonly written as 'DRP'. I love these plans for a few reasons, but mostly because I'm a lazy investor and want to do as little work as possible to earn my money.

How it works

Dividend Reinvestment Plans are super simple. To sign up you fill out a couple of online forms that takes less than five minutes. Once these are completed, rather than receiving cash dividends, your money is automatically reinvestment in the company. Without even lifting a finger, you receive more and more shares of a company each quarter. The only involvement you have is reading the statements and feeling smug about your good choices.

Discounted purchases

One of the companies I own shares in (from before I learned about Vanguard and bought individual stocks) has just announced their quarterly dividends. For everyone enrolled in the DRP they are offering a 3.5% discount on the share price. Put simply, the shares are currently worth $2.10 each, but I'll be buying new ones with my dividend for $2.02. If I was to sell them immediately, I would make 18c on each share - which is great considering the dividend they are paying is only 4c per share. 

Of course, if I wanted to sell these new shares, I'd need to pay brokerage.

No brokerage fees

One of the biggest kicks in the teeth when buying shares is the brokerage fees. When I was investing, the cheapest fees I could find was $30 a transaction. Absolute madness! When buying $3,000 worth of shares, I would immediately be behind 1% because of the transaction costs. There are new systems available that only charge $6 a transaction, which is much better, but still a fee I'd like to avoid. With a dividend reinvestment plan, you don't pay brokerage - which is money back in my pocket. 

Automation

I am such a millennial - my favourite part of DRP's is that they're automatic. I am lazy. Whenever I have to think and plan, I get tired and I want to nap instead. I have a finite amount of brain function each day, and I love doing absolutely nothing to recharge.

Having a completely automatic reinvestment plan is great.

DRiPping my way to riches

Dividend Reinvestment Plans are amazing for the lazy investor, because they create a set and forget path to wealth. The quarterly distributions remind you that you own a piece of a company and should keep an eye on it just in case, but otherwise there is nothing to do. Historically some of the most successful investors have been the ones who simply forgot they had investments, and uncovered them years later.