Dividend snowballs and DRIP: How reinvesting dividends can build your portfolio
Dividends can be a great way of supplementing your existing income, but how about using them to build your portfolio faster? Dividend growth investing is one of the strategies that a lot of investors opt for, allowing them to take advantage of a compounding effect—most often described as the dividend snowball.
In general, stocks (usually ASX) and managed funds will offer to deposit your dividends directly into your bank account or brokerage platform cash balance. Alternatively, some will offer a DRIP option.
What is DRIP?
DRIP stands for Dividend Reinvestment Plan. It's a program offered by many companies and brokerages that allows investors to automatically reinvest their dividends into additional shares of the stock, often without any transaction fees—although keep in mind that you’ll still need to pay tax on those dividends.
This makes the process of reinvesting dividends seamless and efficient, allowing you to take full advantage of the compounding effect without lifting a finger.
What is a dividend snowball?
When you invest in dividend-paying stocks, you receive periodic payments from the company. Instead of cashing out these dividends, you reinvest them to purchase additional shares. Over time, the number of shares you own—and consequently, the dividends you receive—increases, creating a compounding effect that can significantly boost your portfolio's value.
Investors generally describe this as a ‘dividend snowball’. It starts small but gathers more snow (dividends) as it descends, growing larger and larger. Of course, the difference is that it’ll ascend. Here’s a handy way of visualising this exponential growth when starting with $10,000:
- 5 years: The investment grows to approximately $16,105.
- 10 years: The investment increases to around $25,937.
- 15 years: The original investment has more than quadrupled at $41,772.
- 20 years: The investment grows to approximately $67,275.
- 25 years: The investment reaches around $108,367.
- 30 years: The investment skyrockets to about $174,494.
The magic behind the dividend snowball is the power of compounding. When you reinvest your dividends, you're essentially earning "interest on interest," or in this case, "dividends on dividends." This can have a dramatic impact on your portfolio's growth over the long term.
For example, if you initially invest $10,000 in a dividend-paying stock with an annual yield of 4%, reinvesting those dividends could nearly double your investment in 20 years - assuming the stock's price and dividend yield remain constant. When also adding in regular contributions, the amount of growth becomes even steeper.
Benefits of a dividend reinvestment plan
- Automated growth: With DRIP, the reinvestment is automatic, making it easier for you to stick to your investment strategy.
- No or low fees: Many DRIPs offer the option to purchase additional shares without brokerage fees, making it a cost-effective strategy.
- Dollar-cost averaging: Since you're buying shares at different price points, you benefit from dollar-cost averaging, which can reduce the impact of market volatility on your portfolio.
- Flexibility: You can start small and let the snowball effect work over time, making it an accessible strategy for investors of all levels.
Things to keep in mind
- Overexposure: Reinvesting dividends in the same stock can lead to overexposure to that particular asset. Diversification can be a helpful way of mitigating this by investing in a broad range of stocks, an ETF, or a managed fund.
- Tax Implications: Dividends are often subject to taxation, even if they're reinvested. Recording your dividends can be a helpful way of simplifying tax-time
- Market Risks: Like any investment, dividend-paying stocks are subject to market risks. Make sure to research before committing your money.
For more information on investing, check out some of our share trading guides. If you’re looking to get started in share trading, then check out our share trading page or have a look at some of the providers in the table below.
Share account comparisons on Mozo
Share Investing
Standard
Small trade brokerage
Monthly fee
$0.00$0.00CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
Share Investing
CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $0 for trades up to $1,000. Greater of $11 and 0.1% for trades over $1,000.
- Settle from any bank account
- Settlement account offered
- ANZ Cash Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Share Investing
Share Trading
Small trade brokerage
Monthly fee
$3.00$0.00Invest in AU stocks, US stocks, HK stocks and ETFs on moomoo trading platform. US trades from $0.99 USD, other fees apply. Backed by a Nasdaq-listed fintech. (T&Cs apply).
Share Trading
Invest in AU stocks, US stocks, HK stocks and ETFs on moomoo trading platform. US trades from $0.99 USD, other fees apply. Backed by a Nasdaq-listed fintech. (T&Cs apply).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Ongoing free access to real-time US market data.
- Brokerage details
- ASX trades are 0.03% the transaction amount, minimum $3.00 per order. US trades from $0.99 USD, other fees apply.
- Settle from any bank account
- Settlement account offered
- Customer funds held in segregated trust accounts with HSBC.
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- Additional regulatory pass-through fees apply for US trades. Options are available for US markets only.
Read our Mozo Review to learn more about the Share Trading
Share Trading
Small trade brokerage
Monthly fee
$7.70$0.00Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
Share Trading
Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $7.70 brokerage for trades under $100,000, then 0.05%.
- Settle from any bank account
- Settlement account offered
- Macquarie Cash Management Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Share Trading
Share Trading
Small trade brokerage
Monthly fee
-$0.005000+ stocks and 19 exchanges all on the eToro app. Invest in ETFs with $0 commission and stocks with just US$2 per trade. Join the world’s leading social trading platform, trusted by 30+ million users worldwide.
Share Trading
5000+ stocks and 19 exchanges all on the eToro app. Invest in ETFs with $0 commission and stocks with just US$2 per trade. Join the world’s leading social trading platform, trusted by 30+ million users worldwide.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $2 USD brokerage fee for stock trades, 0.5% fee is applied to all funds paid into or taken out of the USD settlement account
- Settle from any bank account
- Settlement account offered
- Customer funds are held in a Trust Account managed by JP Morgan Chase and Co
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- $5 USD withdrawal fee applies and a $10 monthly inactivity fee is charged after 12 months with no login activity.
Read our Mozo Review to learn more about the Share Trading
Tiger Account
Small trade brokerage
Monthly fee
$2.99$0.00Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus receive US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit of at least AUD 2,000. T&Cs apply – for full details, go to the Tiger Brokers website.
Tiger Account
Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus receive US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit of at least AUD 2,000. T&Cs apply – for full details, go to the Tiger Brokers website.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Mozo special offer for new users only: 7% p.a. on uninvested cash balance for 150 days valued up to AUD2,877. Plus get US$30 TSLA and US$30 NVDA shares with accumulated deposit more than A$2000. T&Cs apply.
- Brokerage details
- 0.03% of trade value, $2.99 minimum brokerage.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Tiger Account
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