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 Once in a while those marketing folks come up with a great name and Drip Investing is certainly one of those situations. The term Drip is really an abbreviation for dividend reinvestment plans, which offer investors the opportunity to reinvest all or a portion of their dividend payments right back into the company's stock.
What is Drip Investing?
As previously mentioned, the concept of DRIP investing is really just another name for Dividend Reinvesting Plans or Programs. These dividend reinvestment plans are sponsored by companies that allow individual investors to purchase common stock without going through a broker. The name comes from the plan's policy of allowing the investor to automatically reinvest dividends to purchase additional shares of stock.
Many DRIPs are offered to investors free of any participation charges, while others do charge administration fees and/or charge commissions. And even though the name seems to indicate these plans are limited to reinvesting of stock dividends, some plans also allow participants to directly purchase a company's stock. This enhanced practice is sometimes referred to as optional cash purchases or OCPs.
Advantages of DRIPs
Many companies now offer dividend reinvestment programs, and information is generally offered via the Internet in the investor's section of the company's website. Since these plans are so flexible in allowing even small purchases without a broker's fee, it is really difficult to find any downside to these offerings. In fact, there are several big advantages of these programs including:
- Low Cost of Entry - You really don't need a lot of money to enroll in these programs, most companies allow the purchase of just a single share of stock if that's all that you want and often this purchase is at a discount.
- Cost Effective - Since you are not paying any brokerage fees, all of your investment is working for you from day one. An even better situation exists with around 100 companies that allow the investor to purchase stock at a discount to the current market price via optional cash purchase plans or OCPs.
- Dollar Cost Averaging - Since most of these DRIPs allow the investor to purchase stock via automated weekly or monthly purchases; the investor avoids the problem of purchasing the stock at one point in time. With this long term purchase strategy the investor enjoys a less painful and more structured approach to investing.
Participating in Dividend Reinvestment Plans
Generally, there are three ways that investors can participate in dividend reinvestment plans:
- Company Run Plans
- Transfer Agent Plans
- Brokerage Plans
Company Run DRIPs
A lot of companies today run these reinvestment programs themselves - through their investor relations or shareholder services departments. Several companies have even started to offer Individual Retirement Accounts as well as reinvestment plans. Some companies have policies about owning at least one share prior to joining the dividend reinvestment plan. They may also require the stock to be in your name rather than street name. If you call their shareholder services department, they are usually pretty happy to explain all the rules in simple terms.
Transfer Agent Plans
Due to the popularity of DRIPs, some companies have turned to transfer agents to administer their programs. The transfer agent is a third party broker that usually runs dividend reinvestment plans for many different companies. Since the transfer is running multiple programs using the same resources, they can do it more cost effectively than some of the issuing companies.
Some of the larger transfer agents include American Stock Transfer & Trust Company, Mellon Investor Services, and ComputerShare.
Brokerage Plans
Finally, you should also be aware that traditional brokerage firms are not too happy about dividend reinvestment programs since they eat into their fees. Many of these firms now attempt to mirror the DRIPs by offering investors the ability to repurchase dividends without charging a fee. Unfortunately these plans usually lack the most attractive feature of a real DRIP - the cash purchase of new shares of stock without fees.
About the Author - Drip Investing
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