The importance of Dividend Reinvestment and DRIP's

For the benefit of the long term growth of any portfolio it is key to reinvest all dividends, should you not absolutely require the income there and then. This is known as a dividend reinvestment plan or a DRIP. The best way to explain this is like compound savings on steroids. Put simply all dividends you receive are then reinvested in shares of the company. If you don't need the funds at the time or you are looking to grow your portfolio this is a no brainer and the only way forward is to benefit from a DRIP.

To try to clarify, and this works best with companies who have a dividend policy of dividend growth. You earn a 10p dividend for every share you hold for example. Of the total dividend you receive you reinvest in more stocks. Say you manage to procure another 100 shares with your DRIP. The following year the company has a dividend policy of growth and decide to increase the dividend by a juicy 10%. Obviously this means that your dividend per share increases to 11p per share this year. So you have the dividend from your original shares (with an increase of 10% due to the increased dividend policy of the company but you also have the dividend of your extra 100 shares over and above this). You can see how quickly the dividend growth starts to take hold and accelerate the growth of the portfolio. There is no savings account in the land that decides to increase your return each year. That said whilst the dividend of a stock may well increase, you would also hope that the value of the stock increases so the dividend yield may well actually remain the same over time.