Sometimes hitting the easy button isnâ€™t lazy, itâ€™s the superior option.
One reader, H.C., wrote in to remind us of a dividend investment method that puts that idea into action:
â€śWhile 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.â€ť
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, Iâ€™ll go over the basics.
Then, in my next article, Iâ€™ll identify some choice stocks that make the option available.
Letâ€™s get to itâ€¦
The Lowdown on DRIPs
Certain dividend-paying companies (usually very committed ones) offer an investment option to shareholders called a â€śDividend Reinvestment Planâ€ť (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 â€“ purchasing more of its shares in your name.
If you donâ€™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.
Theyâ€™re the â€śeasy buttonâ€ť solution for long-term dividend reinvestment, and they carry a number of advantagesâ€¦
- 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 â€śdirect stock purchase plan.â€ť 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 wellâ€¦
- 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 itâ€™s a good time to buy or a terrible one, too bad. Youâ€™re in.
- Slow Transactions. If there comes a time when you look at the market and think now is the time to exit, donâ€™t be surprised when your DRIPâ€™s transfer agent doesnâ€™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 weâ€™re all on the same page, stay tuned for the next issue, where Iâ€™ll identify several solid dividend-paying companies that offer DRIPs to their shareholders.
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Source: Dividends and Income Daily