Dividends play a significant role in making profits for most
investors. Companies are aware of this, and therefore offer various arrangements
that their investors can take part of. But some of these arrangements make it
possible for an investor to receive additional shares of company stocks, instead
of cash dividend payments.
This arrangement is known as the Dividend Reinvestment Plan
or DRIP.
What is a Dividend Reinvestment Plan (DRIP
or DRP)
When you take part of a Dividend Reinvestment Plan, it means that your dividend will be reinvested in the
company in exchange of additional shares of stock.
In other words, instead of receiving quarterly or monthly
dividend payments, the company, transfer agent, or brokerage firm that handles
the DRIP, will use the money to buy more stocks and place them under your name.
Through the use of DRIP, participating investors will have increased
amount of equity in the issuing company with each declared dividend.
Pros and Cons
Pros:
- Purchasing one share of stock will be enough to begin DRIP. Those who have to work on a tighter budget will still be able to benefit from the program.
- Invest regularly in small increments over a long period of time making it possible for you to own partial shares. Partial shares cannot be bought outright in the open market which is already an advantage.
- There are brokers and companies that now offer DRIP without asking for commissions which is another factor that helps lessen the amount of capital you have to invest.
Cons:
- Having a regular brokerage account makes it possible for you to buy or sell your owned shares depending on the market trend. But with DRIP, you’ll first have to request for optional cash purchases or termination of DRIP which will then be processes according to the rules of the DRIP.
- DRIPs are not advisable for investors who wish to only hold short-term.
- Another possible disadvantage to DRIP is having taxable income due to the dividend but not having the money or cash to pay for it.
Conclusion
Never neglect due diligence. Find out more about about the
DRIP you’re getting yourself into, there might be fees included that you shouldn’t neglect. No matter how small it may seem now, it will still accumulate
to a considerable amount over the course of time.
Research about the company and the DRIP administrator before
you bite the bait. Don’t compromise yourself when you know that you could’ve at
least done something to prevent bad things from happening to your investments
and more importantly, yourself.
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