DRIP Investing Resources

October 17, 2015

A dividend reinvestment plan, or DRIP, is a plan offered by companies that allows investors to purchase shares of stock with dividends received, without having to actually place a purchase order. This form of payout helps the company by retaining an investor base with a long-term mindset and providing a regular source of funds, while the investor is supplied with additional shares at low or no fee. Instead of receiving your dividends as cash, your dividends are directly reinvested in the underlying equity. Unfortunately, you will still owe taxes on dividend income, whether it is received or reinvested. Also, with a DRIP, you don’t need to wait till you’ve accumulated enough cash from dividends received to buy whole shares; DRIPs take advantage of fractional share purchases.

There are several reasons investors find DRIPs useful. One is dollar cost averaging. Dollar cost averaging lowers your average cost per share by investing relatively fixed amounts (dividend payments are usually steady but increase over time) into the same stock at regular intervals. The average cost is lowered because over time, a stock’s price fluctuates. When prices are up, you purchase fewer shares, and when prices are down, you purchase more.

Secondly, reinvesting dividends helps investors achieve higher returns over time thanks to compounding. Returns are further maximized by the reduction in transaction costs associated with DRIPs.

Many DRIPs do not have charges or fees associated with them. Some DRIPs charge minimal fees, but these fees are often less than what you would pay if you were to use a brokerage firm to reinvest your dividends or purchase additional stock.

Besides a DRIP plan, there is also a direct stock purchase plan (DSPP), sometimes called the direct investment plan (DIP); the similar names often create confusion. A DSPP or DIP allows investors to buy their initial shares of stock directly from a company or their stock transfer agent, bypassing the broker. Investors can set up a DSPP to automatically purchase stock and then reinvest the dividends, if they are paid, through a DRIP. A company doesn’t need to pay a dividend to offer a direct stock purchase plan; however, it does need to pay dividends to offer a DRIP.

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