DRIP – or a Dividend Reinvestment Plan – is a cost-effective mechanism to buy shares on an automated schedule directly from an underlying company. The investor does not receive cash dividends, as he/she normally would, but rather the investor’s dividend is reinvested in the purchase of more shares in the underlying company.
In other words, DRIPs provide an automated means to maximize the power of compounding while minimizing the fees paid for each and every transaction.
If DRIPs are such a great idea, why haven’t I heard of them, you may ask. Well, DRIP investing avoids brokerage fees that one would normally pay to buy shares on the stock exchange. In other words, Wall Street doesn’t profit from DRIPs. So what did Wall Street do? They did the classic Wall Street thing – they lobbied Congress to prohibit direct marketing to the public. I’m not making this stuff up!
So DRIP investing avoids all brokerage fees. Some companies even pay all transaction fees (a list of over 100 are found here, at the largest shareholder services company Computershare) while others charge nominal fees for monthly, automated investments and/or dividend reinvestment. These fees, however, are less than brokerage fees. Pretty good deal, huh?
And another great attribute of DRIP investing? You can start really small – from $10 or $25 per month – and own fractional shares. Try doing that with a broker! And if you are starting this small (spread across one or two DRIPs), please allow me to reenforce a common theme here, once again. Fees will kill all investments, but especially small investments. If you are interested in investing $50 a month across two DRIPs, choose cost-free DRIPs. If you used a broker to invest that same $50 per month (assuming you could buy partial shares), the fees alone could cost up to 30% of the investment. Watch those fees!
Before you get too excited, please do note that an investor must pay tax on the dividend income as it’s received. So your reinvested dividend per year is net of tax. Still, you would be hard-pressed to find another vehicle that could beat this program for long-term wealth creation. As I pointed out in Stocks for Newbies, a $1,000 investment in a variety of corporates provided in excess of $1.2 million (even up to $2 million) over a 50 year period. If you had invested even small amounts per month, in addition the the initial $1,000 investment, this return would have easily doubled again.
One of the best places to start your own due diligence is the shareholder service company that handles all of the necessary paperwork on behalf of the issuing companies. There are two large firms, Computershare and Shareowneronline, that I encourage you to investigate. For a list of all companies Computershare administers, click here. For a list of all companies Shareowneroneline administers, click here.
Some DRIPs do charge fees to sell your shares but these fees are small and since you will not be actively selling shares, this shouldn't pose much of an issue. But, let me say again, as you consider which DRIP to invest in, do have a look at that specific company's fee structure. Money in your pocket, not theirs, is always preferable.
There is a whole host of information on the internet re DRIP investing, some of whom are trying to sell you something, including:
So, summarizing DRIP investing, it enables us to accomplish most of our long-term investment goals, including:
DRIPs are a great 'fire & forget' vehicle (but also strongly recommended for the Occasional Glancer as well as the Hobbyist) to not only receive dividends but to use them to maximize your compounding return strategy. In fact, DRIPs are the single best vehicle in building long-term wealth that I know about….after reading thousands of hours of various investment newsletters…
A key item not yet addressed is which companies to invest in using a DRIP approach. Check out Best Dividends Stocks in the Top Tips section for some ideas.Home > Investment Columns > DRIPs Home > Design your Temple > DRIPs