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.
I 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.