Why Investors Should Consider Investing Through DRIPs

Using Dividends to Buy More Shares of Stock Can Help You Get Rich

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Investors looking to buy stocks without a broker may wish to consider low-cost or free programs known as dividend reinvestment plans, or dividend reinvestment programs, aka "DRIPs." A DRIP account may be opened with a stock transfer agent or another sponsoring financial institution instead of going through a stock broker. Many banks serve as DRIP agents, and many investors also facilitate DRIP accounts through a company called Computershare.

After opening a DRIP account, investors set up reoccurring purchase instructions where money is regularly taken from checking or savings accounts for the purchase of stock shares. In addition to the ease and simplicity of these automatic transactions, which may be set to occur on a weekly, monthly, or quarterly basis, many companies don't charge commissions or fees for this service. And those that do tend to keep fees on the small side—typically around $2.00 per transaction.

Reinvest None, Some, or All of Your Dividends

DRIPs offer the following three ways to reinvest your dividends:

  • Fully reinvest all of your dividend income to buy more shares of stock in the company in order to presumably earn even more dividends in the future.
  • Partially reinvest your dividends, then direct deposit the remaining funds into your checking or savings account. You can set these percentages to your liking—say by reinvesting 70 percent of your dividend income, while banking the remaining 30 percent.
  • Fully pay out all dividends you earn—either by issuing a check or by direct depositing the funds into your bank account.

Who Should Consider DRIPs in Their Portfolio?

For long-term investors who favor high dividend producing stocks, and regularly reinvestment opportunities, a DRIP is an excellent low-cost option. But there are some drawbacks. For example, you cannot borrow on margin against stocks held in a DRIP account and you can't quickly sell off your stock positions, because you must first call the transfer agent or fill out paperwork to start the process, which can take several days. On the other hand, these added measures may give you time to think twice about making rash and impulsive investment decisions.