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Stock Market Investing Directory  - Article Details

What Are DRIPs (Dividend Reinvestment Plans)?

Date Added: July 01, 2008 02:11:17 PM
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Category: Direct Stock Investing: Dividend Reinvestment Plans (DRIP)s

What Are DRIPs (Dividend Reinvestment Plans)?
By Zoran Maksimovic

DRIP (or DRP) is an abbreviation for Dividend ReInvestment Plans. DRIP is an investment plan that allow us to reinvest dividends (to use dividends to buy more stocks) without paying brokerage commissions. Some DRIPs allow purchasing additional stocks, also without paying brokerage commissions. Usually (but not always) DRIPs don't charge commissions. On the other hand the company might give you a discount of 3-5%. To sign in to the DRIP you should already have at least one share of the company on your name. Some companies request owning a minimal number of shares in order to sign in to their DRIP (for example HP). Therefore, you must use a broker to buy the first shares, or buy them directly from the company. Note that not all companies allow direct purchasing. Usually a company that allows direct purchase allows DRIP.

DRIP doesn't necessarily mean that you can purchase shares directly. So what is the point if you have to go to the broker anyway? The benefit is in the possibility to invest and reinvest small amount of money and in the fact that you will avoid the brokerage fees on subsequent buying. For example, if you have a share that earns 3% dividends, and you have shares worth $100, then you will receive $3 dividends. The company will send you a check but you will not be able to reinvest it (due to commissions). Using DRIP the company automatically reinvest your $3. Another advantage is ability to purchase only a fraction of a share. For example, if one share worth $5, then you could buy 0.6 of share reinvesting the $3 dividend.

Being able to invest small amounts of money, you can build a portfolio and diversify your assets without having thousands of dollars. Another benefit is dollar cost averaging. Investing regularly fixed amounts of money will result in buying less shares when their price goes up, and more shares when their price goes down.

Another benefit of DRIPs is possibility to invest automatically. You could arrange that your bank send 50$ each month to the company of your choice. Using this technique you will free some of your time and invest on autopilot. There is a great chance not to invest if you have to think about it. This way you will have to invest your time only once.

The problem with DRIPs is that you will have to invest a certain amount of time in research. You have to find the companies that allow DRIPs. After that you will have to buy the first share. That means that you have to find a low commission broker, or to find a way to buy a share directly. That process you will repeat for each company you chose. There is a little bit of work, but you could tune your system to work without you.

Zoran is a freelance author focused on investing basics. You can read and subscribe to his blog at http://gtdinvest.blogspot.com

Article Source: http://EzineArticles.com/?expert=Zoran_Maksimovic
http://EzineArticles.com/?What-Are-DRIPs-(Dividend-Reinvestment-Plans)?&id=1243884

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