Accelerate Your Returns Through Compounding Investing Dividend Payments

The process of investing a dividend in order to compound dividend payments is a way to increase the returns in your portfolio. Dividends are additional payments made by a company on its stock. These payments provide additional value to a company’s investors and a way to earn income through investing. Dividends are not guaranteed but when declared by a company, paid to the shareholder to use as they wish.

When dividends are used to purchase additional shares of a company’s stock, it has the impact of increasing the portfolios return. The additional shares receive dividends when declared, which in turn are used to purchase even more shares. Over time, in addition to any regular investments that you make, the returns in your portfolio should grow at a faster rate than just investing alone without reinvesting dividends.

Step 1: Set Account to Reinvest Dividends

The way to accelerate your account’s returns is through an account designation to reinvest dividends. This can be done at anytime at or after a trading account has been established with your broker. Having this instruction allows the brokerage firm to direct dividends when paid back in your account for the automatic purchase of additional shares.

You can change at this designation anytime. Maintaining this designation however helps increase the number of shares in the account subject to dividends when declared by the company.

Step 2: Open a Dividend Reinvestment Plan

In addition to setting your account for the automatic reinvestment of dividends, you should open what is known as a dividend reinvestment plan or DRIP account. These accounts, which generally require a small amount to open, will use dividends as a way to grow the number of account shares. As additional shares are added, more dividends will be paid and in time accelerate the returns for the account in the same manner as with your trading account.

DRIPs can be opened with as little as 1 share of company’s stock and can be opened directly with many companies. This lowers your brokerage fees and charges associated with setting up a brokerage account. This allows more money that you can use to maximize your returns through the addition of dividends that purchase additional shares.

Dividend reinvestment does not assure that dividends will be paid as the decision to issue a dividend rests with the company issuing the stock. It can put you in position to profit from those dividends by increasing your shares and the amount of dividend through regular reinvestment at the intervals dividends are declared and paid.

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