Dividend Reinvestment Plan (DRIP) For Starters


Dividends are good investments. And you can make them extra special if you know what to do once you have laid your hands on them. You can reinvest them! A dividend reinvestment plan, or DRIP, is what you need. And while we’re at it, we’ll tell you the perks you can get from reinvesting your dividends.

Dividend reinvestment plan

Drip, drip, drippin'... What’s DRIP?

As implied above, dividend reinvestment plans are a way for investors to reinvest variable amounts in a company. If you reinvest dividends, you can buy shares or fractions of shares (that is, if the dividend amount is less than the value of one share) of some of the most well-known, publicly-traded companies.

Rather than giving the investor a quarterly dividend check, the company that runs the DRIP uses the money to purchase shares of the company (in the name of the investor).

If the company is the one operating the DRIP, it usually sets specific times in a year when the purchase of shares by shareholders in its DRIP program is allowed. They usually do it quarterly. The company generally does not go into the secondary market and buy the shares and then sell via the DRIPs.

The shares sold via the DRIP are brought out of the company’s reserve, and you cannot sell the DRIP share on the market. If you’re ready to sell your DRIP shares, you must sell it back to the company that issued it. Of course, you’ll follow the current price.

If a brokerage firm operates the DRIP, the brokerage buys shares for you from the secondary market. They then add the shares to your account, and these shares will be eventually sold back on the secondary market.

What’s in it for you?

DRIPs are quite beneficial for many investors and traders.  For one, company-operated DRIPs are commission-free. This is because you don’t need any broker to facilitate the trade. This one’s extremely appealing to new investors, who would have to save up funds for a long time just to make the usual brokerage commission fee become a small enough portion of their purchase amount.

In addition, some DRIPs offer optional cash purchase of additional shares coming directly from the company. These cash purchases usually come at a 1-10 percent discount without fees.

You must also consider that DRIPs are flexible.  You can invest small or large amounts, depending on your financial position. Some DRIPs enable investors to contribute as little as $10—or as much as $500,000 at one time.

Further, DRIPs utilize dollar-cost averaging, which is the process of averaging out the price at which you buy a stock while it moves through peaks and valleys over a long period. What does this mean for you? It simply tells you that you don’t have to buy a stock right at its peak or low.

Lastly, some drips offer the stocks at a discount from its spot price in the market. You might get a discount ranging from 1 percent to as much as 10 percent. When fused with zero commission fees, the cost basis of these shares for you can be substantially lower than it would be if you bought it outside a DRIP.

Want to learn more about stocks? Read Picking Stocks: 4 Things to Consider

What’s in it for the company?

If you’re curious, you might be asking yourself, “Why would a company bother with selling a couple of shares here and there?”

For a simple answer, the advantage is that DRIPs offer low-cost access to capital. When you buy a stock on a stock exchange, you are practically buying it from another investor like you, and that means the company doesn’t have any benefit from that transaction at all.  DRIPs are different, though. The DRIP shares are bought directly from the company. Then, the funds obtained from the purchase are then reinvested into the company.

Moreover, companies also benefit from DRIPs because they want a stable shareholder base that has a long-term investment style.

If you become a DRIP investor, you are unlikely to run for the exits when the markets start to frown at you. This is partly because DRIP shares are less liquid than shares in a regular brokerage account, as well as in the secondary market.

Selling DRIP shares costs you a little more time and effort than just talking to your broker over the phone. Keep in mind that if shares are from the DRIP operated by the company, these shares need to be bought back by the company. In other words, easy sales stuff are allowed, unlike in the general stock markets.

Read more about DRIPs! Learn about its Advantages and Disadvantages!

Final Word

Well, that’s just for starters. There are still a lot to learn about DRIPs. For now, you just have to remember that DRIPs are a good way to use your dividends. Determine first if you think this one’s good for you, and then do some research about the inner workings of different DRIP operators.

For further reading, check Shares and Dividends

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