The Advantages of Investing in Dividend Reinvestment Plans (DRIPs) (2024)

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The Advantages of Investing in Dividend Reinvestment Plans (DRIPs) (1)

Dividends are an important factor in making any investment decision. They have a significant impact on the overall return of a particular investment. That’s why I lovedividend reinvestment plans.

While in the short term it may not seem like you couldgain much from reinvesting small amounts of dividends, over thelong-term you could be missing out on significant gains from the effect of compounding interest. One of the easiest ways to maximize investments in dividend stocks is through dividend reinvestment plans, or DRIP for short. There are many advantages of dividend reinvestment plans that investors can use to purchase stock.

What Is A Dividend Reinvestment Plan

Dividend reinvestment planshave been offered by many companies for quite a long time, but they are becoming ever more popular with investors. Offered directly by the underlying company, a DRIP is essentially a method by which shareholders do not receive dividends in cash but rather in additional shares of stock.

DRIP is an acronym for a dividend reinvestment plan. This type of investment program is a convenient way to buy stocks in a particular company without the assistance of a broker. Investors may purchase stocks by either:

  • Having the dividends they obtain reinvested to buy more stock; or
  • Purchase shares with minimum optional monthly payments of $25 or $50.

Who Should Invest in a DRIP?

DRIPs are plans you may want to include in your portfolio for retirement or for long-term savings goals as they offer the investor a number of advantages. DRIPs allow you, the investor, to acquire stocks that are well-regarded and highly valued. Plus, you are not under any obligation to invest in the account each month.

Whether you have a lot of money or have little to spare, DRIPs give you the opportunity to own company stock in some of the largest companies. You can purchase whole shares or fractional shares and will accumulate whole or fractional dividends. In many dividend reinvestment planprograms, you are entitled to buy discounted shares. As a result, you receive an automatic profit on your investment. DRIPs, in many instances, charge little or nothing to purchase shares.

How Do You Sign Up for a DRIP?

To sign up for a DRIP, you either have to already own a share of the company’s stock, or you can buy stock directly for an initial investment. If you want to enroll in a dividend reinvestment planthat requires a share of stock to join, then you will need to go through a broker to obtain that first share.

On the other hand, if you want to avoid using a broker, you can sign up directly, as stated, with many companies offering DRIPs. Usually, your initial investment will be in the neighborhood of $250 with the option of making monthly payments of $25 or $50.

DRIPs with direct purchase plans allow you to invest in the stock by automatically withdrawing a certain amount from your bank account on a monthly basis. If you want to maintain a schedule of ongoing investments for savings or retirement, this is an excellent route to take. Several DRIPs also provide individual retirement accounts or IRAs that the company will administer for you, usually for a small charge annually.

If you decide to participate in a dividend reinvestment planor a direct purchase plan, you will first need to request the company provide you with the plan prospectus which can give you all the information you need about the plan. Usually, you can obtain these details from the website of the company.

Once you sign up and pay your initial investment, you can start making additional investments immediately. The certificates of stock will be in the possession of the company and can be obtained at your request.

You can also invest in dividend stocks through a smartphone app like Stash. Stash is the new way to save and invest. You can start small and gradually build your portfolio. Stash is an investing platform that makes it easy to start with as little as $5. You’ll learn the basics so you can do it yourself.

Plus, Stash’s curated educational content will help you develop smart financial habits. They provide simple tips and guidance so that you can invest with confidence.

Advantages of Dividend Reinvestment Plans

Theadvantage ofdividend reinvestment plansand plowing your dividends back into your investment is that it has a significant effect on your investment returns over time. This can be found in the impact that compounding has.

By buying additional shares in the same company you gradually increase your holding, but you also receive ever-increasing dividends as your total holding not just your initial investment increase over time. In many markets and industries, this could result in returns that are more than 50% higher than if you did not opt for reinvestment throughdividend reinvestment plans.

Companies that offer dividend reinvestment plans generally handle the process directly, and you usually only need to fill out the relevant forms to partake in the plans. When each dividend payment date comes around, your broker is not sent a cash amount but is rather notified about additional shares that have been allocated to you. Your total shareholdings continue to increase through DRIPs.

With every dividend payment, you increase your holding in the company automatically. And, the more successful a company becomes, the greater your investmentgrows, which helps boost your overall investment returns.

DRIPs Often Offer Investors A Discount

One of the biggest advantages of dividend reinvestment plansis that many companies often offer a discount on the official share price. This gives you an immediate leg up and a positive value of yournew shares of stock. While the discounts are usually quite small, this all helps in the long-term. In addition to the discount, signing up for such a reinvestment plan greatly reduces your stock purchase costs since you are skipping the stockbroker or your discount brokerage firm.

Even with discount brokers like Scottradeand TD Ameritrade, it is generally not worthwhile for youto buy small amounts of stocks. The buying and selling fees have an immediate impact.

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For example, if you bought $100 worth of shares and paid $7 commissions to buy and sell, then the shares would have to increase by 14% just to for you to break even. This is where DRIPs become especially beneficial for small-scale investors who receive only small amounts of dividends. There are no commissions and typically only very small fees involved.

Dividend reinvestment plans are by far a greatway for investors to ensure that their portfolios are performing at the highest level possible while saving the investor money in commissions. By reducing costs and taking advantage of compound interest, every investor should take advantage ofdividend reinvestment plans.

I buy shares of companies directly from them using websites like Computershare. It’s a great resource to get into purchasing DRIPs, and the company acts as the central agent for most of the companies on the S&P 500.

Do you invest in DRIPs? What are your favorite companies to invest in using dividend reinvestment plans?

The Advantages of Investing in Dividend Reinvestment Plans (DRIPs) (3)
The Advantages of Investing in Dividend Reinvestment Plans (DRIPs) (2024)

FAQs

The Advantages of Investing in Dividend Reinvestment Plans (DRIPs)? ›

DRIPs offer shareholders a way to accumulate more shares without having to pay a commission. Many companies offer shares at a discount through their DRIP. Between no commissions and a price discount, the cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market.

Should I use drip to reinvest dividends? ›

A DRIP established at a company doesn't offer the same cost benefits over a brokerage that it used to, so those looking to reinvest dividends are probably better off turning to their brokerage. Still, if a company's DRIP plan lets you buy stock at a discount to its market value, that can be an attractive incentive.

What are the advantages of dividend reinvestment plans? ›

Dividend reinvestment can be a good strategy because it is:
  • Cheap: You won't owe any commissions or other brokerage fees when you buy more shares.
  • Easy: When you set it up, dividend reinvestment is automatic.
  • Flexible: Though many brokers won't let you buy fractional shares, you can with dividend reinvestments.

Are DRIPs a good investment? ›

The takeaway

DRIPs can offer long-term investors a way to save money as they continue to invest in the same company over time. However, it's important to weigh your long-term goals with your short-term needs to determine if participating in a DRIP makes sense for you.

Which of the following are advantages of DRIPs? ›

Which of the following are advantages of "DRIPs"? Additional shares of the issuer are purchased with no commission charges, The investor can add to an existing position in that issuer without having to place an order through a broker, The process of buying additional shares via a DRIP allows for dollar cost averaging.

Does drip avoid taxes? ›

If a DRIP is active in a non-retirement account, the dividend income is a taxable event and will be reported on your 1099-DIV as if it was received in cash.

What are the cons of dividend reinvestment? ›

Dividend reinvestment has some drawbacks. One downside is that investors have no control over the price at which they buy shares. If the stock gains significant value, they'd still buy shares at what could be a high price.

Does Warren Buffett reinvest dividends? ›

Reinvesting Dividends: Instead of taking dividend payouts in cash, Buffett reinvests these dividends to buy more stock shares or new stocks at great value prices. This is key.

How do I avoid paying taxes on reinvested dividends? ›

To do this, simply hold the dividend-paying securities in a tax-deferred retirement account such as a 401(k) or IRA. Contributions to these accounts may be tax-deductible, so your dividend reinvestments escape taxation at the time you make them. After that, your money grows tax-free over time.

Are DRPs worth it? ›

A DRP can be a great way to grow your investment over time, and can also help you to diversify your portfolio. By reinvesting your dividends back into the company, you can receive additional shares in return at a lower cost. This can help to boost your investment's value and performance over the long term.

Do DRIPs count as income? ›

Consequently, it's considered to be income and is therefore taxable. And as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road.

How effective are DRIPs? ›

In addition to the most widely cited benefit of curing hangovers, IV vitamin treatments can supposedly help fight exhaustion and boost the immune system. However, there is little scientific evidence to back these claims. "These treatments are mostly harmless and really just result in people making expensive urine."

What is the safest investment with the highest return? ›

Here are the best low-risk investments in July 2024:
  • High-yield savings accounts.
  • Money market funds.
  • Short-term certificates of deposit.
  • Series I savings bonds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
Jul 15, 2024

What are the benefits of drip dividends? ›

DRIPs offer shareholders a way to accumulate more shares without having to pay a commission. Many companies offer shares at a discount through their DRIP. Between no commissions and a price discount, the cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market.

What is the benefits of drip? ›

Prevents disease by minimizing water contact with the leaves, stems, and fruit of plants. Allows the rows between plants to remain dry, improving access and reducing weed growth. Saves time, money, and water because the system is so efficient. Decreases labor.

When to stop reinvesting dividends? ›

Automatic dividend reinvestment is best if you are a low-maintenance, hands-off, or infrequent investor. If you contribute monthly to different taxable investments or want to do tax-loss harvesting, then turn off the automatic dividend reinvestment.

What is the best way to reinvest dividends? ›

A simple and straightforward way to reinvest the dividends that you earn from your investments is to set up an automatic dividend reinvestment plan (DRIP), either through your broker or with the issuing fund company itself.

Do I pay taxes on dividends I drip? ›

The IRS considers any dividends you receive as taxable income, whether you reinvest them or not. When you reinvest dividends, for tax purposes you are essentially receiving the dividend and then using it to purchase more shares.

When should you not reinvest dividends? ›

Another case for not reinvesting dividends would be if you already have a large position in a stock or fund and don't want to buy more of the same security. Not reinvesting dividends (and using them to invest in something else instead) can help improve a portfolio's diversification over time.

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