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
- 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.
- 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.
- At Fidelity Investments, reinvesting is free. But unlike with Schwab, it's possible to reinvest proceeds from dividend-paying ADRs.
- 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.)
- 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.
- 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.
- 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.
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.