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DRIP's

Dividend reinvestment plans or direct reinvestment plans (“DRIPs”) are an excellent way to start investing in the stock market, to save for retirement or for college costs, or to build a stock portfolio with a minimum start-up investment. One makes a small initial investment and then additional purchases at optional regular intervals, with dividends being reinvested into the common stock of the company selected. It’s an easy way to enjoy the benefits of both the time value of money concept and dollar cost averaging. There are both company sponsored plans and broker sponsored plans. I would use only company sponsored plans, to eliminate the broker’s commission.

These programs require a small initial investment, usually $250 to $500, or company shares in the form of a stock certificate. Some plans offer a smaller initial investment, but require automatic withdrawals from your checking account for approximately ten months. Then, on a regular basis or periodically thereafter, you can invest in more shares, usually for a minimum amount that ranges from $50 to $100. Dividends can also be reinvested into whole or partial shares. Most plans require that you pay commissions when you sell.

DRIPs benefit both the companies and the investors. The companies get a broader investor base, who are usually loyal purchasers of their products. Some companies also use these plans as an opportunity to raise additional capital. The investors benefit because they can build equity positions with small cash outflows. They also benefit from the compounding of dividends and the use of dollar cost averaging. Some companies offer a small discount on purchases, and many companies pay for the administration costs of these plans. Costs are kept reasonable, but you should comparison shop. Most companies make it easy for investors by having automatic monthly purchases taken directly from the investors’ checking accounts. Many people also use DRIPs to give a gift to a minor. It’s a “win win” situation for all parties. 

Stock selection and timing are the most important factors in a DRIP investment strategy. Companies that fit the buy and hold strategy, as well as dividend paying securities, are ideal for DRIP investing. These plans are best suited for strong companies in basic industries that can stand the test of time. More and more companies and retail brokers are offering these plans, enabling investors to pick from a broad array of companies in different industries.

DRIPs also make a very nice gift to minors. This is a great opportunity for kids to learn about investing. Start them out with the classic buy and hold type companies in time tested industries like energy, defense, industrial gases, food, water and utilities. If the family holds onto the securities, the minors may read the annual reports over the years. Hopefully, this will facilitate the learning process, and be valuable when they become an adults and have their own money to invest.

Investing in DRIPs is time consuming. First, you need to select the company. Then, you need to obtain and complete an application form. Many companies require you to be an existing shareholder; in that case, you need a stock certificate in your name. You would purchase the original share(s) from a broker; when the certificate is received, you would forward it with the application to the company to start your account. While the process can be time consuming up-front, the benefits can last for years in the form of valuable assets.

 

P.S.

Below is a comment that I posted to the home page in early 2009, as the stock market crashed; you may find this of value:

With the first wave of the stock market crash behind us, many individuals are now left with the task of rebuilding their stock portfolios, a process that could take decades. Utilizing direct reinvestment plans (DRIPs) to average back into the market is a effective starting strategy. Transaction costs, however, can be expensive, nonetheless, Drips offer a path to invest in high quality, dividend paying, companies with little upfront money. Stick with the well managed organizations that manufacture and sell necessary and recurring products; have attractive profit margins, little debt and healthy cash flows. Here are some suggestions:  Colgate-Palmolive, Kellogg, Campbell's, Air Products, United Technologies, Lockheed Martin, Halliburton, Monsanto, Becton Dickinson and Aqua America.  Be patient, this is a 20 year plan.     Good Luck, Joe Spinella

P.S. Here are a few companies that manage Drip programs; the fees vary, so be diligent:
-Computershare Trust Company 800-205-8314
-BNY Mellon - Shareowner Services 800-279-1227
-American Stock Transfer & Trust 877-322-4941

 

 

 

 

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