A dividend reinvestment plan (DRIP) is an investment program offered by many companies that allow investors to purchase stock directly, or through a transfer agent, from the company. Many of these plans only require the purchase of one share to get started. Instead of sending you a quarterly dividend check, your dividends are reinvested into purchasing more shares of stock. Many companies also allow shareholders to purchase additional stock directly from the company, sometimes at a discount.
DRIPs offer companies a very cost effective means for raising equity and promotes long term investing. For investors, a DRIP is a very affordable way to invest in some of the world’s leading corporations without having to come up with a large amount of money to invest or pay high broker fees and commissions. Investors can often get started in a DRIP by purchasing a single share of stock. In addition, purchasing additional shares is often available in small dollar amounts with low or no fees, and sometimes at a discount as well. By participating in a dividend reinvestment plan, investors take advantage of dollar cost averaging by investing on a regular basis over the long term.
There are some disadvantages to dividend reinvestment plans. Investors must still pay taxes on dividends even though they do not receive dividend checks. Record keeping can also get quite complicated. Investors make keep track of their cost basis on each purchase of stock. Another potential drawback is that the investor can only purchase additional shares at specific times designated by the company, so investors cannot time their purchases.
Despite some disadvantages, a dividend reinvestment plan offers a great way for the small or beginning investor to get started in stock investing. For many dividend reinvestment plans the purchase of a single share of stock is all you need to get started. Once you are enrolled in the plan, your dividends are reinvested automatically for you and you may also be able to purchase additional shares or fractions of shares by sending in optional cash payments for as little as $10-$25. Dividend reinvestment plans encourage you to take a long term investment approach, keep your costs down by avoiding paying broker fees and commissions, and allow you take advantage of dollar cost averaging.
To get started in a dividend reinvestment plan, you first need to investigate which companies offer these plans and then find out what their specific requirements are for getting started. You may need to purchase one share through a discount broker or go through the company’s transfer agent or a DRIP enrollment service. One you are enrolled in the plan, you can just let your dividends reinvest and you can also consider purchasing additional shares when they come available.