What To Know About Dividend Reinvestment Plans (DRIPs)

Sometimes hitting the easy button isn’t lazy, it’s the superior option.

One reader, H.C., wrote in to remind us of a dividend investment method that puts that idea into action:

“While I agree with your perspective on dividends, I use an additional qualifier: The dividend must also have a DRIP. Without a DRIP, maintenance for long-term growth is a chore. Please find some good dividend stocks that also have DRIPs.”

I couldn’t agree more wholeheartedly, H.C.

Chores are a drag, and DRIPs are a great way to ease the routine burdens of dividend investing.

But because not all D&I readers are fully up to speed on the ins and outs of DRIPs, I’ll go over the basics.

Then, in my next article, I’ll identify some choice stocks that make the option available.

Let’s get to it…

The Lowdown on DRIPs

Certain dividend-paying companies (usually very committed ones) offer an investment option to shareholders called a “Dividend Reinvestment Plan” (DRIP).

The idea behind a DRIP is simple: Every quarter (or year, for annual distributions), the company takes the cash that it would otherwise disburse to you as a dividend payment, and automatically reinvests it – purchasing more of its shares in your name.

If you don’t need the income quarter-in and quarter-out, and just want your position to grow over time, then DRIPs are the way to go.

They’re the “easy button” solution for long-term dividend reinvestment, and they carry a number of advantages…

  • Low Maintenance. DRIPs are hands off. Once you set up the plan and do a little paperwork, the program is off and running on rails. The company handles everything for you. Just sit back and watch your dividends grow.
  • Low Barrier to Entry. Getting started is easy and cheap. The initial minimum investment is often very small. Sometimes as low as $100.
  • No Fees. Most companies that offer DRIPs also offer a “direct stock purchase plan.” This means that the initial stake can be purchased from the company directly. So you can skip the hassle and cost of using a broker. Reinvestments are handled the same way.

In other words, no brokers from start to finish.

But as with any investment strategy, there are a few downsides, as well…

  • Quirky Initiation. Not all DRIPs are cut from the same cloth. Each company will have different minimum purchases and transaction mechanisms.
  • Relinquished Control. Dividend reinvestment programs work automatically and according to a pre-determined schedule. So whether you think it’s a good time to buy or a terrible one, too bad. You’re in.
  • Slow Transactions. If there comes a time when you look at the market and think now is the time to exit, don’t be surprised when your DRIP’s transfer agent doesn’t jump out of bed to execute the trade. Depending on the firm, selling your shares could take weeks. So be aware: DRIP investing is only for the long haul.

So there you have it, the ups and downs of dividend reinvestment programs.

Now that we’re all on the same page, stay tuned for the next issue, where I’ll identify several solid dividend-paying companies that offer DRIPs to their shareholders.

Safe investing,

Ryan Anders

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Source: Dividends and Income Daily

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