Club Mailbag Insights

We received a question from John in Illinois, a long-time member of the club, asking about the potential benefits of using a dividend reinvestment strategy in his investment portfolio. He’s been under Jim Cramer’s coaching for years and feels he’s gained a lot from it.

Investors are generally encouraged to consider dividend reinvestment plans, often referred to as DRIPs. These plans can really help in compounding gains over time. It’s worth noting that in the CNBC Investing Club portfolio, we don’t reinvest dividends; instead, we donate them to charities.

With a DRIP, instead of receiving cash dividends, investors automatically purchase more shares with their dividends. For instance, if a stock pays a $1 dividend, those who use a DRIP would receive $1 worth of shares instead. This can even include fractional shares. However, if someone relies on dividends for immediate expenses, then this approach may not be suitable for them. Stocks can be quite unpredictable, so keeping cash on hand is often a better idea for those who need liquidity.

But for many, DRIPs offer a hands-off way to let compound interest work in their favor. Some more active investors might prefer cash dividends. This way, they can reinvest or use the cash when they see fit. However, we find that reinvesting dividends is often more beneficial in the long run. After all, if you’re invested in a company, it’s likely because you believe in its potential. Why then leave dividends as cash that might just sit there?

For long-term investors, a more passive strategy can be especially advantageous. Since constantly checking accounts can lead to stress or hasty decisions, a strategy that minimizes that urge might be better. As Charlie Munger, Warren Buffett’s long-time partner, once said, “Big money is waiting, not buying and selling.”

Let’s look at the numbers. For example, from 2014 to the end of 2024, the SPY ETF, which tracks the S&P 500, has seen a cumulative price return of about 185% without including dividends. But once dividends are reinvested, that total jumps to 239%. It’s a significant difference that highlights the power of compounding.

As a member of the CNBC Investing Club with Jim Cramer, you’ll receive alerts about trades before they’re executed. Jim ensures there’s a waiting period after sending out trade alerts—45 minutes for regular trades and 72 hours if he mentions stocks on CNBC. It’s all part of maintaining an informed and strategic approach to investing.

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