DRIP – Dividend ReInvestment Plans
Reinvesting your dividends is like compound interest on a bank account.
It goes like this.
1. You have 100 shares of Verizon, each share costs $51 and Verizon pays $2.56 in dividends for each share.
2. You get $256.00 in dividends.
3. With your $256 of dividends, you buy 5 more shares.
4. That means the next year when Verizon pays a dividend of $2.56 for each share you will get $268.80. (105*$2.56)
5. With this dividend you can buy another 5 shares.
6. That means that the following year when Verizon pays a dividend of $2.56 for each share you will get $281.60 (110*$2.56)
Buying more shares with dividends increases your return exponentially. This means that the first year you will get $256 in dividends, the second year $268.8, the third year $281.60, the fourth year $294.40, the fifth year $307.20, not reinvesting you would have received $256.00 each year.