The Benefits of DRIP and How To Use It

The following is a guest post from Dan@StockTrades.ca

Dividend stocks at one time or another will more than likely become the backbone of your investing portfolio. Especially in your later years, the passive income from your dividend investments can play a pivotal role in your retirement. But if you are a young aspiring investor with a keen eye on early retirement, what is the best thing to do with that dividend check? In my honest opinion, it’s setting up a DRIP plan.

So what exactly is a DRIP plan?

A DRIP, or dividend reinvestment plan is a system set up by your broker,company or financial institution to purchase more stocks with your dividend payouts. The shares are purchased in fractions if your dividend payout is not enough to purchase a whole share. The best way to imagine this is a bucket stopping a leak. Every time water “drips” into the bucket, it fills. Once the bucket is full, you’ve earned a share in that company. You dump the bucket out, and repeat the process.

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Recent Buy – Baby R2R’s New Portfolio

At the beginning of January, I set the following goal for the financial well being of our baby daughter. I am happy to report that I have started putting this plan into motion.

> New portfolio for our daughter – In 2016, my wife and I welcomed our daughter. Time to set things in motion for the financial well being of our baby daughter.

  • We have opened up a new RESP (Registered Education Savings Plan) account, which allows us to save and invest for her post-secondary education. The plan allows us to get education grant money from the government and is tax-deferred on the income generated. We intend to start investing this money soon and will post an update on which stocks/ETFs we chose.
  • In addition to the RESP plan, we intend to start a DRIP plan to put away a small amount of money each month (starting off with $100/month for now) that will be her nest egg when she is an adult. Time is one of the most powerful weapons in an investor’s arsenal and starting off a DRIP plan allows us to let the investment compound over the course of 20-ish years. I’ll post an update soon on which stock I am picking for this plan.

The Education Plan

A quick background on the Registered Education Savings Plan (RESP). RESP is an account type available to Canadians to save, invest and grow funds for post-secondary education. While not only limited to kids, it is generally targeted to help parents save for their kids’ education. The best part of this plan is that the government matches the contributions via the Canada Education Savings Grant (CESG). The grant amount is 20% of contributions to a max of $500 per year. So, to maximize the benefits, we would contribute $2,500 per year into this account.

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