Compound interest is the result of previously gained interest earning yet additional interest. Because you earned interest on not only your original balance, but on the increased balance also. It’s this “earning interest on the interest” that defines compound interest. Dividend compounding is similar to interest compounding, for the reason that the trader can get “dividends on dividends” if she or he uses the dividends earned to buy additional shares of the dividend-paying company. Is reinvesting the dividend difficult? No, but it is not always as automatic as a saving account.
On the plus aspect, dividend compounding can be more rewarding when compared to a savings account. Reinvesting dividends can be carried out in an automatic fashion, if the investor owns shares of a company which offers a Dividend Reinvestment Program, referred to as a DRIP commonly. If an organization (for example Coca Cola) offers a dividend reinvestment program, the investor must contact the trader relations section at demand and Coke the enrollment information.
The paperwork is not difficult, and speaking generally, you’ll only do it once. Most companies do not handle the accounting or paperwork of their DRIP programs, preferring instead to delegate this process to what’s called a transfer agent. Transfer agents are reputable organizations, like the Bank of NY.
- Know whom you can trust
- Rule two, remember guideline one
- Neither spouse claimed a ยง121 exclusion within 2 years of the sale of the principal residence
- He can carry out comprehensive investment research and monitor the stock market
- 12 Global Digital Led Retail Banking Market Forecast (2018-2024)
- Not pull down on their capital
- Annual 10 year cash flow projection
Once you’re signed up for the DRIP program, your activity and statements are reported by the transfer agent, not the ongoing company. Don’t let this technique of enrolling and dealing with a transfer agent to discourage you, as it truly is rather easy and both ongoing company and its transfer agent are there to help you.
Once you are signed up for a DRIP program, once you are paid a dividend – usually every three months – those dividends are used to buy additional shares in the business. 1000 values of Coke stock at whatever price Coke stock is actually choosing on that day. The other way to reinvest dividends is to do-it-yourself. 1000 to buy more shares of Coke in your own account.
10 for humble-sized transactions. An additional concern when reinvesting your dividends consists of diversification. Whereas an organization handled (or transfer agent handled) DRIP programs suggests the buyer is reinvesting dividends in that same company, any buyer attempting to diversify his or her holdings might choose instead to reinvest dividends into another company. 1000 in dividends from Coke, she, or he might want to make investments in those dividends in a different company, such as Microsoft, or Proctor and Gamble.
Thus in this example, Coke is financing your situation in Microsoft. And then of course, you will want to reinvest those Microsoft dividends back to Microsoft, or somewhere else perhaps. Of how or where you reinvest dividends Regardless, the long-term goal is to compound dividends by reinvesting them into ever-increasing returns.