I hope by now you see the wisdom of reinvesting dividends if you're attempting to build wealth for the long term.

Typically, the easiest way to do it is through your broker. Most brokers do not charge commissions or fees for reinvesting dividends. If yours does, find a new one. There's really no reason to pay a fee or commission on such a small transaction.

When you allow your broker to reinvest the dividends for you, all of your portfolio information is in one convenient place.

Not all brokers have the same options available. For example, Schwab and E^*TRADE don't allow you to reinvest dividends of foreign stocks that trade on U.S. exchanges called American Depositary Receipts (ADRs). An example of an ADR would be drug giant Novartis (NYSE: NVS). The company is based in Switzerland but trades on the New York Stock Exchange

On the other hand, TD Ameritrade allows you to reinvest your dividends in ADRs.

In my opinion, this is a significant issue. A well-balanced portfolio will include companies located outside the United States. The inability to reinvest the dividends into the stock is a deal killer if you're trying to create wealth through dividend reinvestment.

Scottrade has a unique program called Flexible Reinvestment Program (FRIP). You can't automatically reinvest your dividends in the stock that pays them. Rather, the dividends can be reinvested in any eligible stock or exchange-traded fund (ETF), including those that don't pay dividends. The advantage is that the investor has more control over where to allocate the dividend. The disadvantage is that it requires more work for the investor and you can't buy fractional shares as you can with a traditional dividend reinvestment.

Scottrade's FRIP is an interesting idea, but what I like about dividend reinvestment plans (DRIPs) is how simple they are and that the investor doesn't have to think about it. As long as the investor is comfortable with the stock, she can set it and forget it.

Long-term investing success comes from investing in quality stocks and then doing a whole lot of nothing. Letting those dividends compound year after year is what will lead to building wealth. When the investor has more decisions to make, like in the FRIP program, it usually leads to worse outcomes.

Consider if you were invested in Intel. In October 2013, the stock was trading at around $22 and had a 4% dividend yield. Wall Street considered the chip maker a dinosaur, saying that the PC was dead and that Intel had not successfully grabbed market share in the mobile space.

If you had one of those flexible reinvestment programs and listened to Wall Street analysts, which you should never do, you might have put your dividends into a stock that seemed to have better prospects.

A year later Intel is up 50%, trading in the mid 30s. It turns out the PC was very much alive. Had you automatically reinvested your dividends in Intel, you would have picked up shares in the low 20s last year. Chances are, if you had to think about which stock to invest your dividends in, you would not have chosen Intel, considering how negative everyone was on the stock.

This is just another example of why we don't mind when a stock goes down or buying beaten-up stocks. As long as it's a quality company with enough cash flow to pay and raise the dividend, good things usually happen in the long term. You may have to put up with some pain and aggravation in the short term, but that lets you pick up more shares on the cheap.

Additionally, if we have another meltdown like we had in 2008 and early 2009, how many of us would have the guts to put the dividend payments right back into the market? Many people would think, “The market is tanking right now. I'll invest it later when stocks are lower.” The only problem is I promise that those same people will not call the bottom. They'll wait until things look better, in which case the market will be considerably higher already.

By automatically reinvesting the dividends, they are guaranteed to put at least some money to work at or near the bottom of the market. Their own emotions of fear and greed, which ruin many investors, won't get in the way.

Table 9.1 shows you some of the major online discount brokers that do not charge for dividend reinvestment but have certain details you should know about.

However, not everyone likes to keep his or her stock in a brokerage account. Some prefer to deal directly with the company they're invested in.

Those people can usually reinvest their dividends through the company.

You can also buy more stock directly from the company if it offers a direct stock purchase plan (DSPP).

With a direct stock purchase plan, you send your check right to the company, and it credits your account with more shares. If you own 100 shares of a $20 stock and send the company another $200, your account will show that you are the proud owner of 110 shares (assuming there are no fees, which there often are—we'll get to that in a minute).

But here's why I don't like company DRIPs and DSPPs: They often have fees and commissions that are higher than those of a broker.

For example, let's take a look at Altria (NYSE: MO), a company that qualifies under the 10–11–12 System. Its yield is 4.7% and it has averaged over 11% dividend growth for the past 10 years.

Figure 9.1 shows the list of fees you would have to pay to reinvest your dividends or purchase stock directly from Altria.

Let's break down these fees. First it will cost you $10 to set up the plan. If you want to purchase stock directly, it will cost $5 plus $0.03 per share. If you buy more than 167 shares at any one time, the cost likely will be more expensive than using a discount broker that normally charges $10 to buy stock.

You can see it will cost you a bunch of money to sell any of your shares—$25, plus $0.12 per share. That's a lot more than you'll pay at a discount broker. The only way this plan makes sense is if you're using a full-service broker that charges you more than you would pay in the direct purchase plan.

But what really steams my britches (Is that a saying? Sounds like it should be.) is that it will cost you as much as $3 to reinvest your dividends.

If you receive $100 in dividends, using the DRIP, you'll get to reinvest only $97 because Altria is charging you $3 each time you reinvest your dividends. That's money that belongs in your pocket. It's money that will stay in your pocket if you're using most brokers to reinvest the dividend.

Let's look at another company. (See Figure 9.2.) Clorox has similar fees to Altria for direct purchase. However, you won't pay anything to reinvest (other than the $15 initial setup fee).

In my mind, there is no reason to pay these fees. If investing or reinvesting directly is more convenient than using a broker, you'd have to weigh the pros and the cons and decide whether the additional fees are worth the added convenience.

But for a portfolio of stocks, it actually is far less convenient to keep track of 5, 10, or 15 separate accounts rather than one brokerage account containing all of your stocks, where, by the way, you'll probably pay less out-of-pocket for all of your transactions.

The one wrinkle in all of this, where it may be worth your time to consider a DRIP, is when the company offers the stock at a discount.

You heard me right. There are some (not too many) companies that allow you to reinvest your dividends at a discount from the current market price. That's free money right there.

For example, water utility Aqua America (NYSE: WTR) offers a 5% discount when you reinvest your dividends.

As I write this, the stock is trading at $23.59. If you were to reinvest your dividends today, you'd pay $22.41 per share. Not too shabby. That's a built-in extra 5% on all shares that you buy through reinvested dividends over the lifetime of the account. Considering we're banking on a long-term average of only 7.84% annual gain in the stock to meet our goals, you're nearly already there with the portion of your money that's reinvested. (The shares bought with the original principal still need to gain their 7.84% per year.)

You've seen the power of compounding dividends. You understand that you want to buy stocks as cheaply as you can. Here's a way to do it for $0.95 on the dollar. The discount will help you accumulate more shares that will generate more dividends that will lead to more shares, and on and on.

Healthcare Realty Trust (NYSE: HR), a real estate investment trust specializing in health care, charges no fees or commissions for direct purchases or reinvestment of dividends and allows you to reinvest the dividend at a 5% discount.

Not many companies offer discounts to shareholders—only about 73 at the moment. If you're interested in a DRIP, be sure to visit the company's investor relations page on its website and closely examine all fees, commissions, discounts, and the like so that you have a clear understanding of what your costs will be versus keeping the stock with your broker.

As you can tell, I think the only time it makes sense to reinvest directly with the company is if you're getting a discount or if you're with a full-service broker that will charge you more than the company charges for each transaction. But even the full-service guys often allow you to reinvest your dividends for free, so look at all of the costs involved before making a decision.

Summary

• DRIPs and DSPPs can be a convenient way to reinvest dividends and buy more shares, but doing that often is easier through your broker, particularly if you own more than one stock.
• Not all brokers' dividend reinvestment options are the same. Get all the details from yours to make sure it fits your needs. In most cases, I recommend the most convenient and automatic method so that you don't have to make any decisions where emotion will get in the way.
• DRIPs and DSPPs often charge fees for setting up the plan, reinvesting dividends, and buying and selling shares, making it cheaper to use your discount broker.
• Some companies offer discounts of as much as 5% on reinvested dividends. In those cases, it may be worth participating in a DRIP—but be sure that other fees don't eliminate the benefit of the discount.
• Fifteen dollars to set up a DRIP? Are you kidding me?!