Millionaires and Dividend Reinvestment Plans

One of the, I wouldn’t call secret, but definitely underpublicized, methods of how people built million dollar fortunes is the structure they used to attain that money.  If you invest, what is the method for how you do it?  For a vast supermajority of people, they log into their brokerage accounts with their investment firm, place an order, get a confirmation and execution statement, and then go home happy.  Fine and dandy, but by doing so you are paying fees to a middleman, your broker, which eats into your returns.  So what happens if you try to buy stocks without a “traditional” broker?  Well, a lot of people, particularly brokerage firms would say its not recommended, but a lot of companies don’t just sell their products to their customers, they also sell stock to their investors.

The ways companies do this are DRIPs which is short for dividend reinvestment programs.  Generally there are two ways companies allow people to invest in these plans.  One is for people to agree to a set amount of money which is taken out of their bank accounts every month.  The second is they make a single contribution that has to be greater than a certain amount that the company specifies.  The first is generally the most popular by a wide margin.  An example will help explain.

Let’s say you have two newly wed teachers who together can only save $300 a month.  If they invested this in a brokerage account that charged them fifteen dollars a trade, they are giving up 5% of principle.  For people just starting out, that is a ridiculous way to try to build wealth.  I say that partially from personal experience.

This couple, being teachers, are much smarter than myself and they do their homework before they start investing.  They see that ExxonMobil has a drip plan that has ZERO fees attached.  All they have to do is sign some paperwork for the drip plan on Computershare. That process will take them five minutes tops.  Afterwards, that $300 is taken out of their bank account and invested in Exxon Mobil stock.

Now of course this story becomes a lot more interesting when you see the wealth that was accumulated if this hypothetical couple started this 30 years ago.  If they had $300 taken out of their bank account every month and reinvested the dividends they would now have almost a million dollars before inflation and taxes are considered.  Yes a million dollars just from being disciplined in their stock purchasing habits.  (If you are interested in seeing the math broken down there are a few websites that will give you a fair approximation if you google them.)

This is why news stories come out occasionally about janitors who leave behind millions of dollars despite only making a little above minimum wage.  Part of what they did is they structured their affairs so that as little money went to brokerage fees as possible, and instead went to buying as much stock in a business as they could.  This is why companies’ drip plans need to be better publicized.  For beginners just starting out they need to get as much equity as possible without seeing it disappear in the form of brokerage fees.

Disclosure: (Please note that I do not have a fiduciary responsibility to you, and I have no positions in ExxonMobil.  This post is for educational purposes and represents my current knowledge on the subject.  I have no intention of investing in ExxonMobil within the next month.  Please do your own research.)