Boost Your Retirement Savings with DRIPs

My very first experience with dividend stocks came from a source I didn’t expect. When I opened a Roth IRA soon after being married, I chose a couple of different funds. To be honest, I didn’t really know what I was doing. I picked a growth fund and an income fund to go into my Roth IRA because I thought such a move would constitute diversification. It was only after the first year, when I looked at the yearly statement that I realized what had happened: DRIPs were part of the income fund.

I saw that one of the funds was paying dividends. But, instead of sending me a check, these dividends were automatically reinvested in the fund. I thought that was pretty cool, even though I didn’t actually know what was happening; all I knew was that I was paid extra, and it bought me more shares of the fund.

After doing some research on the term “dividends”, I realized that what I had was a DRIP. The dividend reinvestment plan associated with one of my funds was helping to boost my retirement account. And, because the fund is in a Roth IRA, the dividends aren’t taxed in the year they are earned. Each year, I read my statement to see how much in dividends I have earned, and see that they are reinvested.

One of the bonuses of this was that my retirement account didn’t take as big a hit as other accounts did. With half (yes, half) of my Roth IRA in an income fund full of dividend stocks, the recession didn’t affect my account as much as others’ accounts were affected. Indeed, I was able to see a big difference between the growth fund and the income fund during the recession.

Because DRIPs reinvest your dividends automatically, it is like getting free shares of the investment. When you have these types of stocks in your retirement account, it means you get more shares for your account. Later, when it is time to start withdrawing, you will find that your extra shares (received essentially for free) could easily translate into more money for you down the road.

Since I inadvertently invested in that income fund years ago, I’ve changed the way I do things. I still have that Roth IRA, but it’s not my only account (for many reasons). Learning about DRIPs has been helpful for me, and the discovery has led me to learn more about dividend stocks as a source of income now. There are many uses for dividend stocks, and it is a good idea to explore how they fit into your overall financial plan.