Money Sense Tips

Dividend reinvestment plans are plans that are offered through companies that allow you to buy stock and reinvest the dividends. Stocks can be purchased in small amounts or large amounts. The key to the dividend reinvestment plan is that any dividends that would be paid out are instead reinvested into the company and more stock is purchased. If you are looking to build up stock in a company, providing it is a successful one, buying into a dividend reinvestment plan may be a good choice.

Dividend reinvestment plans are used by companies to grow capital. The employer gains the benefit of the purchase price of the stock, while the shareholder builds up stock over the years without paying a commission to brokers. Instead the money is reinvested in the stock and more stock is built up. This is a good way to slowly build up a good investment starting from a small amount of money invested.

There are several ways to get involved in a dividend reinvestment plan. Some companies offer the plan directly through their company, while others use a transfer agent or a brokerage company. Transfer agents and brokerage companies can be an expensive route for companies to utilize, however, so oftentimes you will see the dividend reinvestment plan being offered only by a company. The benefit of this is that you will not have to deal with anyone but the representatives from the company and no other out-of-pocket fees will be charged. You will only have to pay for the stock itself and nothing else.

If you do decide to invest in a company that uses a transfer agent or a broker, you may find yourself paying the agent or broker fee. Be sure to do your research before signing on with a transfer agent or broker.

One thing to be on the lookout for is that some companies will offer the chance to buy additional shares by cash purchase at a discount. There are typically no fees attached to this. You will not get this service, however, with a transfer agent or a brokerage company. This is one more reason to look for companies that involve themselves in the dividend reinvestment program themselves.

If you are looking to make a small investment into a reputable company, you might consider a dividend reinvestment program. Dividend reinvestment programs are designed to reinvest your dividends instead of paying them out, in turn offering you more stock in the company at little or no extra cost to you. This is a great way to build up a nest egg over time. As with all investments, be sure to monitor yours closely and pull out if you suspect that your investment is going down the drain.

In an op-ed piece Warren Buffett wrote for The New York Times last fall, the Oracle of Omaha pointed out:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Here is the advice – don’t buy into any of these myths that could one day keep you from living out your dreams …

Myth No. 1: It’s too early to plan for retirement.
According to a study, 49% of people ages 25 to 34 have less than $25,000 saved for retirement. While that’s not particularly surprising, this certainly is: A mere 23% of people over 55 have more than $250,000 saved up — and they’re within a decade of retirement!

Too early to plan for retirement? Hogwash! Can you imagine if Tiger Woods’ parents had told him he was too young to swing a golf club, or if Roger Federer’s coach had told him he didn’t need to practice his forehand yet? A large part of the reason those two men so dominate their sports is because they got a jump start — and they never let up.

The same holds true with investing for retirement. You need to practice, work hard, and focus — so that when game time finally arrives, everything is effortless and just falls into place. Is it a coincidence that Warren Buffett began investing at 11, has practiced every day since, and is now the richest man in the world? I think not.

So, what gives? I think it has a lot to do with the second investment myth you need to ignore at all costs.

Myth No. 2: I can’t beat Federer — so I shouldn’t play.
If you’ve watched professional tennis anytime in the past decade or so, you know that virtually no one can beat Roger Federer — except for Rafael Nadal. Likewise, most people can’t beat Tiger Woods, on Sunday or otherwise. You probably can’t, and I certainly can’t.

Furthermore, it’s not very likely any of us will ever be a better investor than Buffett. Nor is it likely we will one day be able to brag about how we got in early on the next Google (Nasdaq: GOOG) or Netflix (Nasdaq: NFLX) and then rode off into the sunset.

So what? Just because I can’t beat Roger Federer doesn’t mean that years of practice and dedication won’t turn me into an exceptional tennis player. I may never be better than Tiger, but hitting a bucket of balls at the range every day will nonetheless improve my drive immensely.

And just because you may not ever match Warren Buffett’s wealth doesn’t mean you shouldn’t follow his investing style — regular purchases of excellent companies selling for less than they’re worth. Yet many investors mistakenly believe that the only hope for securing life-changing wealth is to “get lucky” and stumble onto the next Genentech (NYSE: DNA) before anyone has ever heard of it.

But as my colleague Seth Jayson points out, there are plenty of well-known stocks that can still deliver superior long-term returns. Believe it or not, from 1957 to 2003, well-known names like Abbott Laboratories (NYSE: ABT), Crane, and Colgate-Palmolive would have delivered you more than 15% annual returns (assuming dividend reinvestment).

And thanks to the unprecedented market sell-off, many strong businesses with high yields are selling at nice discounts. Take, for example, Caterpillar (NYSE: CAT), Coca-Cola (NYSE: KO), and Philip Morris International (NYSE: PM).

Myth No. 3: Planning for retirement is hard.
The final thing that seems to keep many people from achieving their dream retirement is the very thing that could achieve it for them in the first place: hard work.

There’s no sage advice I can quote here, and I’d be lying if I said investing well or planning for retirement was simple. But you must make it a commitment and a priority today — for the sake of your future. Plus, with a little help, it can be far easier than you ever imagined.

If you don’t believe me, I invite you to take a free 30-day trial of Motley Fool Rule Your Retirement. You’ll get full access to all of our retirement experts’ tips and advice, as well as detailed information on the best place to invest your money — whether you’re 20 years out from retirement, 10 years away from retirement, or already there.

Remember, it’s never too early — or too late — to start working toward your dream retirement. Simply click here to get some help on ruling your retirement.

[Source: The Motley Fool]