Dividend Reinvestment Plans (or DRIPs) are an excellent way of making use of the power of compound interest while continuously growing your investments. However, not all brokers offer these types of plans so today we will look at whether M1 Finance has a DRIP.
M1 Finance does not offer a conventional DRIP. However, you can choose to have dividends automatically reinvested in your entire portfolio. In effect, this feature works exactly like a DRIP since M1 Finance also allows you to purchase fractional shares.
The difference between M1 Finance and a traditional DRIP
Traditionally DRIPs are offered by the stock issuing company to direct investors. The broker then forwards this offering to the individual investors and allows them to enroll in the company’s DRIP scheme.
Conventional DRIP schemes thus offer the following benefits:
- Compounding: You can easily take advantage of compounding your received dividends by simply automatically reinvesting them with the same company. Over time, your dividends will thus contribute to the exponential growth of your stock portfolio.
- No Fees: Reinvesting your dividends through DRIPs is typically commission-free. This is because the company issueing the DRIP scheme has an incentive to encourage further investments.
- Fractional Shares: Dividend reinvestment plans allow you to purchase fractional shares even if your broker doesn’t allow your to buy fractional shares manually. This means that all of your capital will be put to work all the time.
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Why M1 Finance does not have a traditional DRIP
As mentioned above M1 Finance does not offer the kind of DRIP described above. Instead, this innovative broker has chosen to offer simple automated investing across the board, whether it’s dividends or not.
The main disadvantage you have with DRIPs is that they only allow you to reinvest your dividends with the same company that paid them out. The main advantage of M1 Finance’s dividend reinvestment options is that any dividend that is paid out can be automatically reinvested fractionally in your entire portfolio.
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What happens to dividends in M1 Finance?
All dividends in M1 Finance will be automatically added to your cash balance after the dividend payment date. You will also be able to track your earned dividends via the portfolio overview above your investment pie:
You can also get a more detailed overview of all earned dividends by clicking on “View”. This will list all paid dividends sorted by issuing company. One feature that is missing here currently is a filter to sort through your earned dividends quickly.
All in all, M1 Finance makes it extraordinarily easy to track and reinvest your dividends in the companies that you choose to reinvest in.
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Will M1 Finance add DRIPs in the future?
Because of how M1 Finance is set up to function it is unlikely that they will also add traditional DRIPs to their offering. Basically, with the current feature set, you get everything you would get from a traditional DRIP and more.
Here are some of the key differences between M1 Finance and traditional DRIPS:
- More Reinvestment Options: With M1 Finance the dividend reinvestment is not tied to one specific company. This gives you greater flexibility and distributes risk across your entire portfolio.
- Dividends Not Reinvested In The Same Company: The benefit desribed above can also be a downside if you would actually like to simply reinvest your dividends with the same company. This more narrow feature is difficult to implement currently on M1 Finance.
- Minimum Investment Amount: With traditional DRIPs all paid out earnings will be reinvested – no matter the amount. However, with M1 Finance there is a $25 minimum investement before trading will be automatically initiated. This means that your dividends may not get invested automatically if the payout was less than $25.
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How to automatically reinvest your dividends on M1 Finance
The simplest way to automatically reinvest your dividends on M1 Finance is to toggle the auto-invest button in your investor dashboard. This will reinvest your entire cash balance once it reaches the minimum threshold of $25:
Since all of your earned dividends will be added to your cash balance, this balance will grow beyond $25 eventually and will then be reinvested in your current portfolio pie.
The downside of this approach is that you may have to wait a couple of payouts before reaching the minimum investment amount, leaving some of your capital to sit idly by the sidelines for some time.
Overall, M1 Finance offers a much more modern and flexible approach to DRIP investing. Although M1 Finance does not have traditional DRIPs on offer they have created some features that make dividend investing simpler and more diversified.
The only downside I have noticed so far is that you will l need to reach the threshold of $25 to be able to automatically invest. However, this feature has not been much of a hindrance to my investment growth since I automatically transfer more than $25 to my investment account on a monthly basis.
I have used M1 FInance now for almost 2 years and have been very happy with their services. If you’d like to read more about M1 Finance and my experience, I have written an extensive review about them which you can find here.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
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To see all of my most up-to-date recommendations, check out the Recommended Tools section.