Investing in dividends is a big must for many investors who are in for the long haul. Aside from the fact that it’s a great source of regular income (if the company paying the dividends is stable and growing), it also provides a way to reinvest quickly and efficiently and reap Trading Benefits—by using dividend reinvestment plans, or DRIPs.
What are Dividend Reinvestment Plans?
Dividend reinvestment plans are the shareholders’ way of reinvesting various amounts in a company, as indicated by various HQBroker Reviews. You’re basically reinvesting the dividend payments you get from the company. In where? In the company itself.
How does it work? Instead of paying full dividends to a shareholder, the entity running the DRIP will use the money to purchase a share or a fraction of shares of the company using the name of the investor. This entity can be a brokerage, a transfer agent, or even the company itself.
If the company is the entity running the DRIP, you will typically have to wait until the specified time when the purchase of additional shares takes place. The shares sold via the DRIP come from the company’s own shares.
On the other hand, you cannot sell these shares on the market. If you think it’s time to sell the shares, you have to sell them back to the company at their current price.
Advantages to Investors
First, DRIPs are commission free if they are run by the company. This is because you don’t need any assistance from any broker just to handle the trade.
This could be a very attractive feature for small investors, who are usually trying to save up some capital. They tend to veer away from brokerages and institutions that require them to pay high commission fees.
Second, DRIPs are quite flexible. You can reinvest in large or small amounts, whichever you think suits your financial status better. You can choose to pay as low as $10 or as high as $500,000.
Third, DRIPs use dollar-cost averaging. Dollar-cost averaging is the technique of averaging out the price where you buy stocks even while they’re moving up and down. You can smooth out the movement’s peaks and valleys, so to speak.
Types of DRIPs
More and more companies are now setting up their own plans. This is due to the popularity of dividend reinvestments, plus the benefits that could be reaped. Meanwhile, there are also other facilitators of DRIPs.
Companies with their own dividend reinvestment plans have their investor relations department. This department takes a hands on approach on the plan.
On the other hand, some companies find that having their own DRIP is a little bit expensive. What they do is they use third parties, or transfer agents. These transfer agents act on behalf of the company and runs the DRIP details.
Lastly, there are brokerages that can set up DRIPs for investors. Brokerages sometimes offer their own reinvestment plans at no cost, which is basically no different from a company-run plan.
There are ways to expand and grow your investments, and these ways come in different sizes and shapes. DRIPs are among the most popular ways of gradually accumulating your wealth until your capital is big enough for you to enter a larger venture.