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Five Reasons I Love Investing With DRIPs

This is a guest post from Hank Coleman who writes about personal finance, money, and investing on his blog, Money Q&A.  Although the article is directed towards U.S. investors, DRIPs are essentially the same here in Canada.

A DRIP Money TreeI love investing in dividend reinvestment plans, also known simply by their acronym, DRIP, pronounced like a drip that comes out of your faucet. They are an easy way to invest directly in shares of stock of a company and skip your stock brokerage firm and their commission. DRIPs are a perfect way for the novice and seasoned investor alike to buy shares of stock in companies that they like, and the plans also provide several unique advantages for long-term investors that you cannot find anywhere else.

What Is A DRIP?

A DRIP, or dividend reinvestment plan, is a way for investors to purchase shares of stock directly from the company instead of using your bank or a discount brokerage firm to purchase the shares. And, as the name implies, investors are allowed to have the company reinvest new dividends into new additional shares of the company’s stock for them. Most companies that issue a dividend issue cash dividends to their shareholders quarterly, and dividend reinvestment plans allow investors to continually add to and build their holdings in a company automatically and without much, if any, action required by the investor every month or quarter. A close cousin to a DRIP is a direct stock purchase plan that many companies who do not offer dividends provide to their shareholders which also allows investors to purchase shares directly from the company’s treasury like a DRIP.

Five Reasons To Love Investing In DRIPs

1. Buying Stocks At A Discount

Some companies’ dividend reinvestment plans allow investors to purchase shares at a slight discount to the share’s current market value. These programs allow you to benefit from having some profit already built in as soon as you purchase the shares. These discounts are only available to members of the companies’ dividend reinvestment plans or direct purchase plans. For example, some companies such as SBT Bancorp (Ticker Symbol: SBTB), Sovran Self Storage (SSS), Piedmont Natural Gas Company (PNY), National Retail Properties (NNN), and several others give investors between a 2% to 5% discount on their stock prices if you purchase shares through their dividend reinvestment plan. Each company has their own policies about the specific discounts that are offered, and investors can find out all of the details in the plans’ instruction documents.

2. You Can Buy Small Amounts Of Shares

One thing that I love about DRIPs is that they allow even the newest of investors to enter the marketplace. All too often, I hear about readers on my blog who feel like they do not have enough money to start investing. They do not realize that they can be investing directly in company’s common stocks for as little as $25 per month. Each company’s direct purchase plan or dividend reinvestment plan has its own separate rules depending on how the company set up the program. Some require a minimum initial investment of $250 or $500, but others waive the minimum requirement if you set up a monthly direct deposit to purchase shares. With as little as $25 investments per month, anyone can begin purchasing shares of stock directly from the company. Of course, you will probably be purchasing fractional shares of the company’s stock, but that should not discourage you from starting. Soon, those fractions will start to grow as you contribute more and earn dividends. DRIPs are a great place to start investing for new investors interested in buying their first shares of a company’s stock.

3. Dollar Cost Averaging

One of the biggest advantages of dividend reinvestment plans is your ability to invest a certain amount of money automatically each month. Almost every dividend reinvestment plan has options on how you can add additional new shares to your DRIP. After you have an account set up, you can purchase new additional shares through either a one-time cash purchase or you can set up monthly automatic payments to purchase additional shares every month. Many companies and the transfer agents that manage their DRIPs allow investors to invest as little as $25 each month in new DRIP shares. If you were investing such small amounts every month through a typical brokerage, even the $7 trades from a discount brokerage firm will quickly eat away at a lot of profits that you would enjoy with your dividend reinvestment plan. While each DRIP is set up slightly different, most have very small fees to purchase shares automatically every month. For example, investing in additional shares of Dell computers (DELL) in their direct purchase plan costs only $2.50 no matter how much money you invest at any one time.

4. Skip The Broker’s Commission

One of the biggest advantages of a DRIP is its extremely low fees on both ends of the transaction. Instead of paying $7 or more every time you purchase shares of stock, you can be paying as little as $2.50 if you purchase your shares through dividend reinvestment plans. The fees to sell your shares typically cost in the range of what Microsoft (MSFT) charges their DRIP participants, $15.00 and 10 cents per share. While this can seem a little pricey, dividend reinvestment plans are meant to be a long-term investment and are not intended for stock traders who want to move in and out of positions quickly.

5. DRIPS Harness The Power Of Compounding Interest

Most investors understand the power of compounding interest. When you have interest income from an investment that earns interest on itself over a long course of time, your returns grow exponentially. DRIPs take the power of compounding interest and runs with it. Each quarter when a company issues its cash dividend, your dividend can be reinvested automatically when you invest in a DRIP. The next quarter, you will continue to earn more in dividends because now your previous dividends are earning for you as well.

How To Find Companies That Offer DRIPs

Most large and mid-size companies have direct purchase or dividend reinvestment plans to offer investors. There are several ways that you can find out how to join the DRIPs for the companies that you want to invest in. one of my favorite ways to track down which stock transfer company handles a company’s dividend reinvestment plan is to check out the publically traded company’s investor relations page of their website. Most companies have links to their DRIPs, sign up forms, and plan documents right on their website. One great website to check out to find DRIPs are Computershare which handles the DRIP plan for companies such as Coca-Cola (KO), Dr. Pepper Snapple Group (DPS), and many others. Another popular stock transfer agent that handles the dividend reinvestment plans for many companies in the S&P 500 index is AmStock. In Canada, Computershare and CIBC Mellon are the primary transfer agents.

Dividend reinvestment plans offer dividend investors a great alternative to purchasing shares of their favorite companies from a stock broker or discount brokerage firm. What about you? Have you had success with DRIPs? Did I miss something else that you love about DRIPs or even hate about them? I’d love to hear about it. Please leave a comment below.

Disclaimer: Hank Coleman is a shareholder and active participant in the DRIPs of Coca-Cola and Dr. Pepper Snapple Group.

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35 Responses to "Five Reasons I Love Investing With DRIPs"

  1. Hank says:

    Thank you so much Ninja for letting me write for your readers! I appreciate it.

  2. bob says:

    It would be nice to hear about the potential downsides of DRIPping. What about the potential problems of determining cash basis information when you decide to sell shares whose valuations are all over the map? What sort of bookkeeping is best for keeping track of details of monthly or quarterly purchases?
    Thank you for the info!

    • Bob Thanx for posting! See my comment below for Chris. Yes you do need to track your individual share purchases each month since it does affect your Adjusted Cost Base. I have an excel spreadsheet setup for this (which I am willing to share with readers), or you can use Quicken. I know Susan Bruner uses Quicken to track her stocks. But yes it does take a little effort to update your holdings and track your investments. You and Chris bring up a good point about the work involved in tracking the purchases and dividends – but its something you should be tracking anyway.

      Cheers

  3. Nice post Hank!

    For me, there is one missing though: DRIPs take the emotion out of investing.

    You can use full DRIPs or synthetic DRIPs to purchase more shares, as an owner in a real business that is going to reward you as a shareholder, through dividends that buy more stock shares automatically. DRIPs help you take emotions out of the buying equation; which is a good thing because as investors, we only have a few factors in our direct control:

    1) fees for what we own,
    2) taxes on what we own and where, and
    3) our own behaviour.

    Maybe # 3) is the most important one! :)

    Great stuff Hank and Ninja, of course.
    Will tweet!

    Signed,
    Big fan of DRIPs and all things dividends,
    Mark

  4. MOA Nicely said!

    “DRIPs help you take emotions out of the buying equation…”

    While I DRIP my dividends synthetically (i.e. through the discount brokerage), I’ve never partaken in the full DRIP through companies. I guess I like to have the flexibility to buy and sell (even when I buy and hold forever).

    Cheers!

    • Hank says:

      Ninja,

      You should try purchasing a DRIP through the transfer agent. Even though DRIPs are set up by the companies to be long-term investments, I think that you will find it almost as easy to buy and share sells through the agent’s website as it is through a brokerage. I’m not sure about Mellon but Computershare has a good website and platform online.

  5. Chris says:

    The only problem with DRIPs is calculating the adjusted cost base for tax purposes… what a nightmare after you’ve held a DRIP for many years.

    • Chris The same could be said for any investment, whether it’s index funds, ETFs with monthly distributions, mutual funds, and even stocks . Even if you buy stocks with a discount-broker the quarterly dividends affect your Adjusted Cost Base. Any investing requires tracking your redistributions, interest income, or dividends.

      Once you have a good spreadsheet setup (which I am willing to share with readers) or software like Quicken, its pretty straightforward and easy to do.

      DRIPs do require a long term commitment to get the benefit. If you’re not patient enough to Dollar Cost Average your shares over the long run, and you are not willing to spend the time to track your investments, then DRIPping isn’t for you ;)

      Cheers

      • anonymous says:

        For stocks, the ACB only affects you if you dollar cost average or reinvest dividends.

        ETFs, REITs, and mutual funds have to take into account return of Capital for ACB.

        Keep track of it in a spreadsheet, where the ACB is calculated for you after every extra purchase of the same investment.

    • Hank says:

      Chris,

      I definitely understand yours and Bob’s points. While you do need to do a little extra work like Ninja mentions, the transfer agents still provide account statements that are a big help in that regard as well.

  6. Jeff says:

    Great post!
    How can an individual like me sign-up with a company like Computershare to start a DRIP account? How complicated is it?

    Or would I need to sign up with the individual company?

    Thanks!

    • Jeff When you access Computershare, select your country, and then click on “Investor Centre Self-service Web Tool”. This will provide you everything you need, including setup, management of your account, and a detailed list of companies offering plans etc.

      For more info, also check out the Canadian MoneySaver which also provides regular information on DRIP plans.

      Cheers!

      • Jeff says:

        Thanks for the quick reply!
        I checked it out…one question I have that I couldn’t find on the website (or CIBC Mellon’s website) is how to get started. It says you need to be a registered owner of common shares prior to starting in the DRIP, so does that mean I need to buy shares through my discount brokerage first and then apply for a DRIP account with Computershare? Are my share holdings then transferred to my Computershare account?

        • Jeff Yes you have to buy shares before you can start DRIPping them. You can buy the shares directly from the companies via Computershare, and then DRIP them. NO you don’t have to buy them from your discount broker first.

          I don’t use DRIP plans so can’t advise you on the specifics, but it should all be there. Readers, care to give Jeff a helping hand?

          Cheers

          • Hank says:

            Jeff,

            Ninja hit the nail on the head. Go to Computershare.com, click on Investor Centre, and log on to your account (or create one with them). After I log in, I see a listing off all the DRIPs that I own through Computershare.

            If you are looking for a new one, click on the “Transactions” button at the top of the page. There you can choose to buy shares in a company to start a DRIP, start a DRIP directly if you already own the shares in “your name” not in “street name”, etc. Clicking the “buy shares” button will let you search for the company you want to invest in by name or stock symbol. Clicking the “investment plan” button allows you to search the same way. Computershare lumps DRIPs and direct purchase plans together in this category.

            There is also a list on the right of their most popular plans as well. For example, if you click on Wal-Mart you will see a complete rundown of the company, its fees, how many shares, you have to own to start with, as well as a link to the plan’s documents (like a prospectus). I highly recommend that everyone take the time to read the plan’s documents. There is also a link there to “buy now” at the top of the description page. That will get you started. You can see with Wal-Mart that they have two options in their plan: one for existing shareholders who have 1 share in their name (not street name) and another purchase option for brand new shareholders. New shareholders have to invest a minimum of $250 USD in Wal-Mart stock to get started. I hope this helps. Leave another comment if you have more questions or feel free to email me directly hank [at] moneyqanda [dot] com.

    • Jeff,

      Give me a little bit and I’ll get back to you.

      I have been DRIPping for a few years now (with transfer agents) and I know most of the ins and outs. Give me some time (after Hallowe’en is gone, trick-and-treaters aren’t visiting our house and looking for goodies) and I’ll get back to you on Ninja’s AWESOME site to answer your questions.

      Sound good?

      Cheers,
      My Own Advisor

  7. Marty says:

    Is it possible for you to share your spreadsheet on DRIPs?

    Great Article and Info…Thank you for providing to Investers!
    Marty

    • Marty Thanx for posting and yes I will be sharing my spreadsheets with investors. I would like to have that article posted this month :) This includes stocks, drips, mutual funds (and index funds) or whatever you want to track. It takes a little bit of time to setup but works well.

      Cheers
      The Dividend Ninja

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