Why do so many of today’s stock market investors take advantage of DRIPs? DRIPs are dividend-reinvestment programs that let you automatically put all dividend income toward additional share purchases. Here’s what you need to know if you want to get involved in DRIPS.
Sign Up With a Company or a Broker
You don’t need a broker to buy into a DRIP because you can sign up directly with the corporations that issue them. But for the sake of simplicity, instead of maintaining, say, a dozen individual accounts with companies, you can sign up for a D.RIP program through a broker, usually for no or very low commission fees.
DRIPs are Powerful
The main thing to remember about DRI Ps is that if the company whose stock you purchase pays a dividend, that amount, no matter how small, goes toward additional share purchases. This is a powerful way to build up the number of shares you own automatically, especially if the company pays regular quarterly dividends.
Buying Aristocrats Can Boost Your Bottom Line
So-called “dividend aristocrats” are stocks that have paid regular quarterly dividends for 20 years or more. If you own aristocrats, you automatically plow money back into your portfolio every time a dividend is paid.
For example, if you own 200 shares of a stock that pays a five percent annual dividend, you’re getting ten additional shares added to your account every single year for no cost to you. The concept of compounding comes into play once you begin to build up your holdings this way.
Your Choice
When you are in a DRIP plan, you can opt to take the dividend as cash if you want. The choice is yours. But most people sign up for DRIPs so they can automatically reinvest their dividends. Also, you can own “fractional” shares in a DRIP, which is not something you can do in a normal brokerage account. If shares cost $100 each and the dividend is $4 for the year, you own four percent of a share, or a fractional share.