HOW MUCH? Dividend Reinvestment Plans

What are dividend reinvestment plans?

   
 

DRIPs are something more than that aggravating noise that you hear coming from the kitchen sink the minute your head hits the pillow at night! A DRIP is an investment plan that allows you (an investor) to buy stock directly from a company in small amounts (for either a small fee or no fee). The upside of these plans is that they allow you to reinvest dividends into buying additional stock, in addition to giving the small persistent investor the ability to become an investing millionaire over a long period of time. DRIPs are a great way to invest for your retirement, in addition to maxing out your 401k investment options. I must say that this is a topic I'm personally very passionate about. I have been personally investing in DRIPs for over ten years and plan on holding them for a very long time, funding my retirement in addition to my 401k plan.

Why are they called DRIPs?

DRIP stands for Dividend Reinvestment Plan. These are plans where you reinvest your dividends in additional shares of stock. A point worth noting is DRIPs allow you to purchase fractional shares of stock, in addition to whole shares of stock. For example, let's say you get a $10 dividend payment, but the stock is trading at $20 per share. Your DRIP plan will buy 0.5 shares of the stock for you when your dividend is reinvested.

Another great way of thinking about the word "DRIP" is you are investing additional funds into the plan without doing anything actively - you're "dripping" additional investments! Over time, this can add up rather significantly if you continue to allow the stock to grow with not only your dividends but also by adding additional small amounts to your account. The miracle of compound interest plays a strong role in the success of DRIPs over the long run. If you're able to hold on for 30 years or more, compound interest will really work in your favor.

How expensive are DRIPs to start?

Most companies will allow you to purchase very small amounts, as little as $25 and some allow as little as one (1) or even zero (0) shares in most cases to start a plan. Typically, even DRIPs with fees end up costing far less than a traditional stock brokerage account. They are much more accessible to the small investor who wishes to become a very big investor over the long run.

DRIPs allow automatic investing each month

DRIPs are great plans for those who have a long term investment goal, they're not so effective if you're going to buy into the plan and then draw it out annually. Since the DRIPs are easy to invest in (with very low optional cash purchase minimums) many people find it really easy to actively add to these plans on a recurring basis. In fact, you can arrange for automatic reinvestments on a monthly (or semi-monthly) basis that allows you to keep growing your investment.

How many companies offer DRIPs?

There are over one thousand companies that offer DRIPs (or DSPs, direct stock purchase plans). Interested in determining which companies are on this list? One great resource that I have leveraged is a book called The Motley Fool's Investing Without A Silver Spoon. I highly recommend it.

Types of DRIPs

There are three basic types of DRIP programs that may be offered to investors: a company run DRIP, a transfer agent run DRIP and a brokerage run DRIP. Let's take a look at the three of them and see how they vary.

Company Run DRIP

Typically these are run from the corporate headquarters through their shareholder relations division. Some of these companies might actually make these a part of an Individual Retirement Account (IRA) to allow small shareholders save for their retirement by using their stock. I actually own one company run DRIP and it is working out well. The DRIP is sponsored by a small energy utility company and I have found that smaller companies typically run their own plans while larger operations go with a transfer agent sponsored plan.

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Transfer Agent run DRIP

Transfer agents are the companies who are responsible for handling the administration of a companies stock. They deal with such things as maintaining a list of shareholders, proxy votes and other information on behalf of the company. As DRIPs have become more popular, many companies have asked their transfer agents to administer their DRIPs as well. One thing to keep in mind with transfer agents is they make money by charging fees. As the years go by, more and more DRIPs that carried no fees in the past are now offering fees. The transfer agents keep pushing on the company to offer fees and then the company caves in. It's important to investigate fees before any investment decision. I have typically found the fees of DRIP programs to be much more reasonable than going through a traditional brokerage account.

Brokerage Run DRIP

This is pretty self explanatory - a broker/dealer administers the DRIP on behalf of the company. Broker DRIPs are the best choice when the company itself does not offer a DRIP plan. What if you want to "DRIP" a newer technology company that does not offer a DRIP plan? You can open an account with a DRIP broker such as Sharebuilder to initiate a synthetic DRIP. I personally like to opt for companies that pay a sizeable dividend and have a history of raising it each year, but there are even some dividend-paying companies that offer no DRIP plan. Your solution: A DRIP Brokerage.

Summary

Basically a DRIP is a way for you to invest small amounts of money on a regular basis into a single stock. It is a great way to dollar cost average over time. Dollar cost averaging means you get a better buy price by spreading out your share purchases into small amounts over time rather than buying all your shares as one large lump sum. DRIPs are a great retirement investment vehicle in addition to your 401k, especially for smaller investors who wish to become wealthy through steady, calculated, and persistent investing over many years. I am personally very passionate about DRIPs and am looking forward to providing future articles on these great plans.

Related topics: Why DRIPs are a great investment

 

 

 

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