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For investors, nothing makes the job of beating the market easier than brokers who willingly hand over free money via reinvested dividends.

Yup, I just said "free money." You see, some brokers have access to company-sponsored dividend reinvestment plans -- they're also called DRIPS -- for equities that pay dividends. A good broker will connect your shares to the DRIP so that each time you're due a dividend payment, the DRIP kicks in and uses the cash to purchase more shares.

Let's walk through an example. Say you own 500 shares of Apple (AAPL). Apple is paying 47 cents per share of dividends quarterly, good for $235 when deposits are made later this month. Reinvesting those dividends would allow you to purchase roughly 2.44 shares of Apple stock commission-free at current prices.

A Short History of Crushing the Market With Reinvested Dividends

The beauty of this strategy is that it can help you beat the market. For instance, in early 2007 my wife and I purchased 150 shares of International Business Machines (IBM) at $95.82 apiece. We resolved to put all dividends back into the stock.

Seven years later, our dividends have purchased 21.731 new shares commission-free. Our returns are better than most as a result. Indeed, our position is up 124.1 percent versus 88.8 percent for the investor who bought but didn't reinvest. (Though, to be fair, they might have made up the difference investing their cash proceeds elsewhere.)

There's also the dividend yield to consider. Stock we've purchased through reinvesting also pays dividends, resulting in an annualized payment that yields 5.26 percent on our original purchase price -- more than double the 2.40 percent new shareholders are getting. Nabbing those extra stubs commission-free has proven invaluable.

Seven Brokers Who Want to Help You Get Paid
  1. Charles Schwab (SCHW). Reinvesting is free, according to a Schwab representative, but some stocks don't qualify. Also, you can't reinvest in dividends paid for American Depository Receipts (known as ADRs), which act like stock but are issued by a foreign company.
  2. E*Trade's (ETFC) dividend reinvestment program is similar to Schwab. There is the added benefit of the company's suave commercials that make you feel like an insider. If, you know, you're into that sort of thing.
  3. At Fidelity Investments, reinvesting is free. But unlike with Schwab, it's possible to reinvest proceeds from dividend-paying ADRs.
  4. Scottrade offers an intriguing option called a flexible reinvestment program. Scottrade says customers with individual retirement accounts, margin accounts or cash are eligible to employ the FRIP, which allows for pooling funds from dividend-paying stocks into purchasing new shares of up to five other stocks or exchange traded funds commission-free, including non-dividend payers. The catch? Scottrade won't purchase fractional shares on your behalf. (There are other caveats.)
  5. Sharebuilder offers essentially the same reinvestment options as Fidelity. Sharebuilder's zero minimum balance and low fees on trading make it a good choice for beginning investors without much capital to invest.
  6. TD Ameritrade (AMTD) offerings are similar to what the other majors offer, but with a catch. The brokerage says in its terms and conditions that it "does not intend" to charge a fee for dividend reinvesting but could change its mind at any time. If it does, the fee will not exceed the commission rate, which as of this writing was $9.99 for Internet-placed orders.
  7. TradeKing's program is similar to what Fidelity offers, but with restrictions. Only stocks or ADRs priced at more than $4 a share qualify. They also must trade on an exchange or quote on the NASDAQ.
While I can't tell you which broker is right for you, if my own experience counts for anything, reinvesting dividends with any of them is likely to be a better strategy than not reinvesting at all.

Motley Fool contributor Tim Beyers owns shares of Apple and International Business Machines. The Motley Fool recommends Apple and TD Ameritrade. The Motley Fool owns shares of Apple, International Business Machines and TD Ameritrade. Try any Motley Fool newsletter service free for 30 days.

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8 Comments

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jtbaxter

The "Free Money" headline is what we used to call 'yellow journalism.' The writer shold check the facts before making broad generalizations. Schwab holds dividends for one business day before making the ADR (automatic dividend reinvestment) or DRIP (Dividend Re-Investment Plan) purchase. If the dividend is payable on Friday before a three-day weekend, the DRIP purchase is made on Tuesday. Maybe that's free money for Schwab!

August 10 2014 at 10:17 PM Report abuse rate up rate down Reply
linmarco

I have DRIP stocks. Be careful when investing in certain ones with various fees. The Moneypaper puts out a helpful booklet guide.

August 10 2014 at 1:03 PM Report abuse rate up rate down Reply
fakeconomics01

Hey DF? Add some substance to your articles and stop guerilla advertising---- Dividend reinvestment has been here for the last several decades.

Hey DF we are getting really disappointed with you -- Bring some qualified journalists and add some good subjects to your site--Please?

August 10 2014 at 8:06 AM Report abuse +1 rate up rate down Reply
1 reply to fakeconomics01's comment
gee.effwye

Journalism? You've come to the wrong place. DF sells itself as financial advice/planning. They'll throw a politically charged or agenda laden story in there to stir the pot, but don't expect to find hard news or journalism.

August 10 2014 at 12:00 PM Report abuse -1 rate up rate down Reply
drbobdez

Whoops! There is a little something missing here. As dividend income, the funds that are used in a DRIP are still taxable. In essence, a dividend can be taken in the form of a cash payment or, in the case of a DRIP, an equivalent share payment. Either way, it is a taxable event. If one takes the cash, part of it can be set aside to pay the tax liability; if taken as shares the taxes have to be paid from other income sources (W-2, 1099, K-1, etc.). There are, basically, three upsides to a DRIP: 1) auto-investment and thus forced savings, 2) commission free investment, and 3) fee-free odd-lot share purchases. The article title is misleading as none of this has to do with anyone giving away "free money." As an aside, I advocate DRIPS, but not for the reasons mentioned in the article.

August 09 2014 at 1:46 PM Report abuse rate up rate down Reply
2 replies to drbobdez's comment
kitharris1

i have a re-investment in a stock i own but they charge me an arm and a leg for it since the amount is not large. can i shelter it somehow by putting it in my IRA or 401k? do you know bob? i bought a stock for pennies and it was later bought out by MDT it was the only penny stock i ever made any money on! lol. but i received a $16,000 dollar lesson on trying to hit home runs. my brother did the same thing on oil wells. lessons learned. haha youngsters, stay in the market, but buy well established stocks. cost average is the way to go in the long run. ;-)

August 09 2014 at 4:26 PM Report abuse rate up rate down Reply
arjohny

obviously you must know reinvested dividends are not taxable in a roth ira and only taxable in an ira when those funds are withdrawn via an rmd or otherwise.

August 10 2014 at 1:13 PM Report abuse rate up rate down Reply
bdyftns

Is this something new : ) I've been doing Dividend reinvestment for years.

August 09 2014 at 10:24 AM Report abuse -1 rate up rate down Reply
scoefield

Loyal 3 is a new brokerage with no fees or commissions at all. Only 54 stocks are available to trade and trades are not executed immediately, but you cant beat the no cost options for dividend reinvestment, monthly investment or buy and selling securities.

August 09 2014 at 8:15 AM Report abuse rate up rate down Reply