Dividend reinvestment plans (DRIPs) are an excellent way to grow your portfolio without putting in your hard-earned savings. An automatic DRIP program can be equivalent to correct dollar-cost averaging, which is continuous, automatic investing the same amount of money. It is the only guaranteed way to beat the market over the long term. To dollar-cost average correctly, we need to: 1.) pay attention to the security involved and 2.) the source of funds.
The security we use needs to be an ETF that mirrors the S&P 500 which, in turn, mirrors the American economy as a whole. That means no stock picking. Picking stocks could result in investing in a company that declines and never recovers. Penn Central Transportation Company, Enron, WorldCom, Lehman Bros. — the list of corporate collapses is long.
The most reliable way to protect against that possible outcome is to invest in history’s strongest economy, the American economy, by buying an ETF which reflects it.
The second point, the source of funds, influences the outcome in a major way as well. If we are dealing with a large amount of money, say from an inheritance or the sale of a business and we invest the same percentage at regular intervals, that is, dollar-cost averaging, our results would not be as good as following the Monday Morning Program.
If, on the other hand, the source of our funds is from our regular income, dollar-cost averaging outperforms the market.
For a closer look at dollar-cost averaging, see our blog on the subject.
Could our regular income be dividend income from our investments? Of course, it could.
Mutual funds have automatic DRIPs making dividend reinvestment effortless. That is not the case with ETFs. We need to reinvest dividends manually, on our own. The Monday Morning Millionaire Program (15.5% annual return since 2012) does not recommend mutual funds because of their significant underperformance.
Reinvesting dividends from your ETF is one of the best ways to grow your portfolio. However, it is not as simple as Mutual fund DRIPs. You will need to do it on your own.