Dividend Reinvestment Plans (or DRIPs) are another effective way to build long term wealth.
What is a DRIP you ask? It is a reinvestment plan offered by a dividend paying company whereby the shareholder’s dividends are automatically reinvested into purchasing additional shares in the company at no cost.
There are a few different options available for enrolling in a DRIP such as...
With this option, you generally have to purchase a share of the company’s stock through your broker and have the share transferred from the “street name” (your broker’s name) to your name personally. They will charge you a fee for this service of approximately $30 - $50.
Once the share is issued in your name, you will receive the stock certificate in the mail. You can then frame it and hang it on the wall if you like!
Next, you’ll need to contact the company’s transfer agent to get the necessary paperwork required to enrol in the dividend reinvestment program. Once enrolled, your dividend payments will be automatically reinvested into the company at no charge.
Many dividend paying companies, largely in the U.S., offer direct stock purchase plans which allows investors to enrol directly in the company’s plan and avoid using a broker completely.
The fees for enrolling in DSPs are commonly between $10 and $20. In addition, the fee to purchase additional shares beyond those being reinvested is usually between $2.50 and $5.00. The fees charged for purchasing additional shares can be minimized by making fewer but larger purchases.
There are pros and cons to investing through a company’s DRIP. Here are some of them...
So as you can see, there are advantages and disadvantages to using dividend reinvestment stocks as part of your wealth building strategy. Automatic reinvestment, partial share purchases and discounted share prices are very attractive advantages, however, not having control over the price at which the shares are purchased is a big disadvantage.
The thing is, using a DRIP doesn’t have to be your only way of investing. You can enrol and a company’s plan, build a small position and then forget about it while you focus on your regular portfolio again. Just let that position compound for years through reinvestment and one day you will be glad you did.
So that wraps up our primer on dividend reinvestment plans... hope you enjoyed it!