Mastering the Art of Passive Income: Exploring the DRIP Strategy for Investors
Most investors like to have dividend stocks as they give a regular source of income. But in some dividend-earning stocks, there is always an option for the Dividend Reinvestment Plan (DRIP), which, when chosen, will act as one of the best compoundings over a long time. First, let’s delve into the DRIP and see all the phases of DRIP, including its compounded over time.
A Story: Michael and His Lemonade stand
Michael is a sophomore who wanted to make pocket money of his own, so he decided to start a lemonade stand business on the university campus. Every month, Michael's lemonade stand earns $1,000.00. He has two options:
- take the monthly profit and spend it or
- reinvest it into his lemonade business.
Michael chooses DRIP over Dividend
Let’s assume Michael decided to use the Dividend Reinvestment option. Instead of taking the $1,000.00 in cash, he buys more supplies for his lemonade stand, such as lemons, sugar, or cups. By reinvesting the money, he is making his business even better and more productive.
Benefits of DRIP starting to flow
Over time, as the lemonade stand grows and becomes more popular over time, Michael will start earning more monthly money. His business has become successful, and now he makes $2,000.00 monthly. With the Dividend Reinvestment option, he can further buy even more supplies and expand his lemonade stand business.
Drawing parallels on Real World companies
By reinvesting the money instead of spending it, Michael is allowing his business to grow and generate more income in the future. This is like how some companies work in the real world. Instead of paying out their profits to shareholders as cash dividends, they offer a Dividend Reinvestment Plan (DRIP), where shareholders can choose to use their dividends to buy more shares of the company’s stock.
Just like how your lemonade stand business grows when Michael reinvests the money, these companies can use the reinvested dividends to invest in new projects, develop…