This is a guest article written by Clare, the founder of MoneyEnergy, where she writes about international dividend investing, DRIPs, and increasing your cashflow. If you like this post, consider subscribing to her RSS feed to get others like it in your reader.
DRIPs (dividend reinvestment plans) were fairly popular back in the 1980s I am told, but now that there are so many low-cost discount brokers, the argument goes, DRIPs are less desirable. Some don’t see what’s so special about them. For others, they’re just plain boring.
I’d like to give you a few good reasons why you should take another look at DRIPs — or check them out for real if you have never done so and aren’t familiar with them. If you don’t know what DRIPs are, you are about to find out.
1. Even with low-cost brokers like Zecco, the best DRIP plans are still cheaper: they’re FREE. They have no commission or reinvestment fees whatsoever. There are no minimum trades you need to make or minimum amounts you need to keep in your account. The cost doesn’t rise after the introductory offer expires. This means you save a lot of money.
2. Networking and computer technologies have enabled transfer agents to store account information and make it available to you online. There is no longer any reason to be concerned about folders and folders of account information and paper records that you need to keep track of yourself. Purchase price information, downloadable forms and tax documents can now all be had online, if you choose to do it that way. You can still, of course, just elect to receive your account information in the mail as always.
4. DRIP plans run through transfer agents like Computershare will reinvest 100% of your dividends back into the stock, not just the amount that will purchase a new share. This has always been a feature of DRIPs. Most brokers do not do this. The ones that do will only reinvest your dividends if they are enough to purchase at least one new whole share. With fractional reinvestment, your money goes to work for you sooner than if you had to wait to own enough stock to buy new shares with those dividends. This means DRIPs are still the best choice for young people or those just starting investing who might not have huge sums of seed money.
4. DRIP stocks are “pre-screened,” so to speak. Let me explain: First, the only companies who can offer DRIPs are those with dividend payouts. Second, companies with DRIPs tend to be well-managed and are interested in keeping their cash flow within the company (simply having a DRIP plan can save them numerous fees). DRIPs give them more flexibility and leverage in times of need as well as times of opportunity (such as acquisitions). Being dividend-payers, they are probably slightly more mature companies and are likely to be less volatile than the market average. Common DRIP stocks, for example, are utilities and consumer goods companies, like Proctor & Gamble. None of this means your DRIP stock is without any risk or that you shouldn’t do your homework, but I believe it does narrow down your selection and make it easier to spot value.
5. The best reason of all, however, that DRIPs are still attractive investment vehicles, is the ongoing discounts many provide on share reinvestment and optional stock purchases. Some companies offer anywhere from a 2-4% discount off the market value of their shares on the day of purchase. You won’t find that anywhere else! Companies do this as an incentive for you to invest and to use their DRIP plan, which, as mentioned in #4 above, benefits them considerably. Compound this benefit with the savings you’ll have on commissions, and you can see how much farther your money can potentially go, and sooner, with DRIPs.
DRIPs are no longer much of a secret in the investing world, but organized information on them can be hard to find. For a more detailed primer on how to get started in DRIP investing, take a look at this guide I wrote to commission-free investing.
Updated September 27, 2011 and originally published September 2, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.