There are a number of strategies employed when building up a retirement portfolio. Investing is one of the best ways to build wealth for retirement, as well as to help you do it in a way that beats inflation.
One of the ways you can boost your efforts to build up your nest egg is to use dividend reinvestment plans. These are great ways to automatically increase the number of shares that you own, and that can mean bigger profits down the road, when you are ready to sell.
What Are DRIPs?
One option for your retirement investment portfolio is to use dividend stocks. You buy shares in companies that pay dividends, and you receive regular payments. Dividends are extra payouts, based on how many shares of the stock you own. If you 100 shares of a company that pays a $0.15 quarterly dividend, that's $15 every quarter, or $60 a year. There are investors that spend years building up a dividend portfolio that becomes large enough that the dividends they receive amount to a decent income stream. Dividend stocks can also work well in retirement portfolios, especially if you take advantage of dividend reinvestment plans (DRIPs).
With DRIPs, instead of receiving a monthly payment, your dividends are actually automatically reinvested in the stock. So, in our example, that $15 you get each quarter is used to buy more shares of the stock. If the stock is $30 a share, you end up 1/2 a share. By the end of the year, assuming the dividend and the share price remains relatively stable, you will have two extra shares. Of course, dividend payouts can change, and stock prices rise and fall. But the idea remains the same: You receive more shares of the stock without paying extra from your own wallet.
Building Up Your Retirement Portfolio
Over time, the extra shares that are automatically added to your retirement portfolio can really start to add up. Even if all you end up with is one extra share a year, over the course of 30 years, that adds up to 30 extra shares. This is just a basic example because the beautiful thing about DRIPs is that you add more shares to your portfolio, and that means that you have more shares that earn dividends, so you end up with more money in dividends, which can be used to buy even more shares. Over time, the effect actually compounds, so you will accelerate your ability to buy more shares, and earn more dividends, building your retirement portfolio.
Later, after a couple of decades, you will have more shares, even though you didn't directly buy the shares. Combined with a dollar cost averaging, DRIPs can be even more powerful in helping you save for retirement. You can end your DRIPs, and you can either use the dividends as a retirement income stream, or you can sell your shares (you'll have more of them) for a bigger profit. With a little careful planning, and by choosing the right dividend investments, you can build up a retirement portfolio that benefits you in the long run, and provides you with what you need to succeed.