There are many ways, but I’m going to tell you my favorite for those getting started. Open a Stockpile account, invest as little as $5 to get started, and make sure you tick the setting to ‘reinvest dividends.’
My Love Affair with Stockpile
Why do I like Stockpile for new investors (or investors who are getting started modestly)?
Simple. They support fractional shares and allow you to reinvest dividends, even for fractional amounts. (I also completely love their custodial implementation, but that’s a subject for another post.)
Let me take a minute to explain that, it’s dense.
What are fractional shares?
Take a stock like Apple. At the moment, it’s $175/share. At “traditional brokerages” (Fidelity, e‑Trade, Schwab) if you want to buy Apple’s stock, you need multiples of the share price. Buy one share, you have to invest $175 (plus commission). Buy two, and it’s $350, and so on.
When you can buy fractional shares, you can invest at your own pace. Let’s say you want to start by investing $20/month. Well, in a traditional brokerage you’d have to wait 9 months before you could buy a share of Apple (and it would feel “expensive”). At Stockpile, you could invest that $20 each month and buy whatever fraction of a share that gets you (include in your calculations the ¢99 commission).
Even if you have $180 on hand, by buying $20/month you create a habit of putting money away each month, rather than having to make a decision of whether to invest or not based on how much cash is in your sock drawer on any given month.
There’s one other benefit. Over the course of the nine months it would take you to accumulate money to invest in that share, you’d earn (and reinvest) three dividends. It’s not a lot of money on an absolute basis (Apple pays a dividend of 1.57% annually, so the dividend on your $20 investment is <8¢)… but we’re working on percentages. So, the percentage dividend on $20 is the same as it is for $20,000. And if what you have to invest is $20… you should have a way to go for it through fractional ownership.
There was a second part of that sentence above: “allow you to reinvest dividends, even for fractional amounts.”
Let’s say you did invest $20/month for three months, then get a dividend of 24¢. You can reinvest 24¢ in Apple, even though that buys you just a fraction of a share. You don’t need to earn a full share price in dividends before being able to invest.
One More Thing
They also have a fantastic custodial implementation. I’m not aware of anyone else doing something like this (let me know in the comments if you do). While not terribly important as an individual getting started on their own, it’s great for parents/grandparents/aunts/uncles who want to use dividend reinvesting as a way to teach their kids/grandkids/
Their app and website are nice, and unlike every other bank I’ve ever used their notifications are clear and written to be easily understood.
You can “trade” with Robinhood for free. Stockpile has a ¢99 commission per trade.
You’re not trading, you’re investing. These are two different things. All other things being equal, I go for cheaper. But they’re not equal. Robinhood has two severe limitations for modest investors:
- You can’t buy fractional shares
- You can’t reinvest dividends
If I were trading, I’d totally use Robinhood. If you’re interested in trading, you should too. You should also stop reading this blog… because I don’t help people learn to trade.
You can’t buy or sell at a specific price point, only at the end of the day’s closing price.
On the surface, this is a legitimate reservation. However, we are trying to accumulate wealth over time not trying to time the market. If you’re accumulating, minor price variations that result from buying at the end of the day don’t really matter.
Similarly, if you “have to sell this minute” you’re doing this wrong. Hopefully, this portion of your savings can be used for long term investing, and even if the market turns down, you can just accumulate more.
If after 20 years of investing you’ve accumulated a lot of wealth, for $75 you can transfer shares into a traditional brokerage as you prepare to sell, and sell from there in a more traditional way.
This post could be 10x as long as it is, and still not be exhaustive. Everyone has an opinion, and many are right (given the right context).
You certainly could get started using a traditional brokerage that supports reinvesting. Just make sure you turn on reinvesting dividends.
In my book, I talked about buying stock directly from the companies themselves. That still works, usually with a larger minimum investment than Stockpile.
I’m trying to keep this as simple as possible so that people overwhelmed by where to start, can get started in a way that helps them learn about what they’re doing. Minimizing options makes decision making easier, and lets you focus on the places where decision making is important as you get started.