One inexpensive way to take advantage of the compounding power of dividends is through Dividend Reinvestment Programs offered directly from a company. After an initial investment of between $50-500, you can buy shares every month with a direct transfer from your bank account, generally with a $25 minimum. Computershare is one of the largest managers of these programs, but other financial institutions offer then as well.

The basic premise is similar to how you can slowly buy shares in a mutual fund, but this allows you to invest in a specific company. Once a month, a direct transfer goes from your bank account to the program administrator and shares are purchased. For example, if you invest $100 a month into a stock with a $50 share price, you will buy 2 shares that month. If the share price is $75, you will buy 1.33 shares.

When the company pays a dividend, the proceeds of the dividend will buy additional shares. When you first start out, the dividend will likely only buy a tiny fraction of a share, but as you keep investing, those additional shares add up and then pay you a better dividend in the future.

I personally participate in four separate DRIP programs – Procter & Gamble (PG), United Technologies (UTX), McDonalds (MCD) and Southern Company (SO). Procter & Gamble runs its program directly and has no fees. The other three are administered by Computershare and the fees vary by company, depending on how much the company subsidizes the program.

DRIP programs can be a great addition to your after tax savings program.

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