As a follow-up article to my investment post last week about dividends, today I’d like to talk about Dividend Reinvestment Plans (aka DRIPs). If you’re unfamiliar with DRIPs, then you are in for a treat because these things are more magical than a rainbow riding unicorn. A DRIP is a program run by a publicly traded company that you can enroll in if you already own their stock or by buying stock directly from them. Each time a dividend is given out, that company will automatically purchase more shares (or a fraction of a share) with that dividend money for you. This is especially useful for someone looking to “buy and hold” their investment. Over time your investment in a DRIP company will grow exponentially, similar to the effects of compounding interest. Like I said….magical! You usually only need one share of stock to participate in the plan, therefore DRIPs are appealing to any level of investor.
Here are the benefits of DRIPs
- You’re employing the Dollar Cost Averaging method with your stock purchase. Dollar Cost Averaging means that you’re buying the same stock at different times during a market cycle (sometimes when the share price is low, sometimes when the share price is high) which is less risky than buying all your shares of a certain stock at once when maybe the share price was high and about to go down.
- Most companies that offer DRIPs allow the purchase and repurchase of shares without charging a commission or fee. Some even offer the purchase of stock at a discount.
- In addition to the reinvested dividends, you can also reinvest your own money into the DRIP at regular intervals. Some DRIPs allow you to reinvest as little as $10 at a time. Everyone has $10 to spare, right?
DRIPs can be great for someone just starting to build their portfolio, because the longer you can allow your DRIP to grow, the better. DRIPs can also be an option for parents looking to start a college fund for their children. Companies such as Johnson & Johnson, Disney, McDonalds, Coca Cola, Exxon, Xerox, IBM, General Mills and 3M all offer DRIPs. To find out which companies are currently offering DRIPs, check out this online directory.
Photo Credit: Tim Collins