What is a DRIP:
Dividend Reinvestment Plans (DRIPs) offer individual investors a
cost-effective way of building wealth. A DRIP is a program run
by a public corporation that allows individuals to reinvest
dividends and/or make cash purchases of stock directly from the
company. Instead of the corporation paying out its regular
dividend in the form of cash to its shareholders, the proceeds
are used to purchase additional shares or fractional shares of
the company. Generally, an individual needs only one share of
stock to become eligible for the DRIP program. Occasionally,
that one share can be obtained directly from the company itself
but normally needs to be purchased from a broker. The company
generally reinvest dividends for no cost - no fees or
There are currently over 1,000 corporations which offer myriad DRIPs. The specifics of the DRIP plans vary as widely as the corporations themselves. For example, some corporations allow investors to make contributions as often as every week. While others only allow stock purchases to be made on a quarterly basis. It's important to do your research and discern all the details of each DRIP plan, which are most easily obtained from the companies themselves.
Corporations which offer DRIPs are more than willing to aide individual investors in getting started because it offers the companies low-cost access to capital. The capital, which is attained by corporations, through DRIPs, is then reinvested into the company itself in order to grow future earnings. It's a mutually beneficial relationship between the investor and corporation and provides the company with a stable shareholder base who typically has long-term investment characteristics, thus less likelihood of volatile price swings. Moreover, the steady flow of capital into DRIP plans helps to stabilize the normal market fluctuations that are associated with any publicly traded company. In short, corporations welcome new investors to their DRIP plans and make it as easy as possible to enroll, for the aforementioned reasons.
Benefits of DRIPs:
There are several benefits to participating in DRIPs. The first benefit of a DRIP is that the plans generally require very small initial investments. Individuals can begin investing with as little as $10 in some of the world's most well-known and respected companies, including IBM, Coca-Cola, AT&T and McDonald's, just to name a few. But don't let the low initial minimum requirements fool you. Many savvy and wealthy individuals use DRIPs as a means of accumulating large blocks of stock and building their own well-rounded, diversified portfolios in growing, well-managed companies. Virtually every type of investor can participate in a DRIP, from the most savvy Wall Street expert to the novice in financial markets, every investor can benefit by participating in a DRIP.
The second attractive attribute to DRIPs is their low cost and lack of commissions. In bypassing the broker and its costly commissions, and buying stock directly from companies, investors lower their costs of investing, which allows for greater profits over time.
A third, and sometimes overlooked, benefit of DRIPs is the fact that most investors will dollar-cost-average, or invest a fixed dollar amount on a regular basis into the plans. The benefit of such a strategy is that it removes much of the emotion that is involved with investing and managing one's own money, which is a detriment to most.
Limitations of DRIPs:
The limitations of DRIPs are few and far between, but noteworthy nonetheless. The nature of DRIPs makes it a bit more cumbersome to liquidate shares. Some companies require that investors call them directly to make sales of stock, while others require such a request be made in writing. However, because it is harder to sell the stock, it reinforces the long-term philosophy which should be firmly ingrained into every investor's frame of mind. The most successful investors think in time frames of years, if not decades. Those very investors are not concerned with the daily fluctuations of their investments. Instead, the focus is upon long-term performance and effective cost management.
To invest in DRIPs, it does require more homework on the part of the individual investor. Instead of receiving advice on which companies to invest in from a broker, the individual is left to his or her own devices. Individuals won't receive help from any brokers concerning DRIPs because Wall Street has no interest in selling stock without commissions. However, the well-informed, empowered individual is better off making her or his own decisions concerning financial matters. And DripAdvisor is here to do just that, empower the individual investor.
While DRIPs are beneficial for their cost-effective approach to investing, they are still subject to tax considerations. Dividends are a form of income and are treated as such as far as the Internal Revenue Service (IRS) is concerned. Even though the investor might reinvest the dividends received by a corporation, those payments are still considered as income and need to be accounted for. While the dividends received by a corporation are taxable in the year they were paid, the gain in share price of the stock is not taxable until it is sold, which is generally at a much lower tax rate if the shares are held for more than one year. Here again, we reinforce that the long-term philosophy pays off because investors can take profits in stock and pay less taxes in those stocks are held for longer periods of time.
Taking The Leap:
For investors making their first endeavor into the stock market, by the means of a DRIP, it's prudent to start with a solid company with sound management, stable financial performance and growing earnings. Here at DripAdvisor, we highlight a new company every week with the aforementioned attributes, along with the necessary information to become enrolled with their DRIP plans. We will provide investors with a broad review of some of the most well-run, respected companies in the world in an attempt to help make the actually stock picking process much easier.