A dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company. The investor does not receive quarterly dividends directly as cash; instead, the investor’s dividends are directly reinvested in the underlying equity.
This allows the investment return from dividends to be immediately invested for the purpose of price appreciation and compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs are free of charge for participants while others do charge fees and/or proportional commissions.
DRIPs have become popular means of investment for a wide variety of investors as they enable them to effectively take advantage of dollar cost averaging with income in the form of corporate dividends that the company is paying out. Some of the other advantages are…
- You don’t need a large amount of money to start.
- Most companies allow investors to purchase additional shares through a dividend reinvestment plan for nominal fees — or often no fee at all.
- Many companies have DRIPs that allow investors to purchase stock at a discount to the current market price. Some as much as 10%.
- It’s automatic, and allows investors to have a more long term investment view.
Why am I bringing up dividend reinvestment plans?
Right now is a great time for value investors to go bargain shopping. The markets have dropped considerably in a short amount of time, and it looks as though the trend will continue. In times of uncertainty, dividend paying stocks generally hold up better than those that don’t. So if you were to buy stock via a DRIP right now, you can dollar cost average into an uncertain market at good prices.