A DRIP is what is known as a “Dividend Re-Investment Program.” Even though the term contains the word “dividend,” most modern DRIPs do not actually involve the reinvestment of dividends due to the fact that most corporations today do not in fact issue dividends. However, DRIPs are still going strong because of all of the other aspects they have taken on in recent years. So with that said, let’s get into the nuts and bolts of DRIP investing.
DRIPs are offered by nearly every corporate firm. By offering a dividend reinvestment program, a company allows people to buy shares in the company directly from the company itself rather than on the open market. In most cases, you are able to buy stock from the company at a discount (sometimes a very significant one) compared to buying the stock on the open market. Additionally, with a DRIP you can set up direct deposit style withdrawals from a banking or checking account in order to buy a small amount of stock each month. On top of that, when you are enrolled in a DRIP investment, any dividends that the company issues are used to buy more shares of the stock rather than the standard method of a check.
Why use a DRIP?
Together, the discount on share price, monthly purchasing, and the reinvestment of dividends allows you to build up a large position in a company’s stock in a relatively short period of time. Most people who are enrolled in a DRIP find that they hold a very large number of shares before they even realize that they have been building a position over time. A DRIP also does not require a great deal of effort or attention in order to build a sizable number of shares owned. In fact, DRIP investing is one of the best ways to invest if you are not a person who enjoys watching the monthly ups and downs of the market.
How to Enrol in a DRIP:
The most common form of DRIP is an employee DRIP. That is, if you work at a company whose stock is on the open market, it is usually possible to enroll yourself in your company’s DRIP, particularly if part of your compensation is in the form of stock and options. You can specify that a certain portion of your paycheck be used to build your position through your DRIP, and in some cases a company will match a certain portion of your contribution every month. An employee DRIP is a wonderful way to earn money beyond your base salary.
The other form of DRIP is a stockholder DRIP. To enroll in one of these programs, you must hold a certain number of shares in a company before you are allowed to enroll. Most firms, however, set this minimum at one share. Once you are a shareholder, setting up a DRIP is as easy as contacting the firm’s investor relations department and asking about their dividend reinvestment program. Since most companies handle the specifics of their program differently, it is impossible to offer individualized advice on this matter. However, in most cases you will be asked to transfer your currently held shares from your brokerage to the company itself and/or its transfer agent. Should you decide to enroll in a firm’s DRIP, you should strongly consider allowing them to debit your checking or savings account for a set amount of dollars each month. There are numerous benefits to this:
- You will be forced into a sound investment strategy. When you buy a certain dollar amount of shares each month, you automatically buy more shares when the price is low and less shares when the price is high. Additionally, you will be forcing yourself to think on a longer-term basis. When you buy shares each month, you are less tempted to look for cheap or easy gains.
- You will be saving money without having to make a conscious decision each month. One of the hardest parts of actually saving money is actually making the decision to do so. When the decision is made automatically for you, you have no choice but to make the right decision.
- You will build a very large position over time. Most people buy and sell shares in large chunks and wonder why they are unable to build consistent positions. Automatically purchasing shares in a company each month is an effective way to build a huge position.
- Dividend reinvestment programs are one of the open secrets of stock market success. The investing public is generally unaware of these programs, but savvy investors take full advantage.