CWA Dividend Reinvestment Plans Report

Dividend reinvestment plans, or DRIPs, are plans offered by some companies that let shareholders receive additional shares of stocks or trusts in lieu of cash dividends.

The advent of low cost discount brokerage and on-line investing has reduced the commission cost of investment trades to low levels. Thus, the commission free investing that DRIP investing allows is less of an advantage today than it was in the past. Still, DRIPs can be a good way to slowly build wealth over a long period, for a number of reasons.

First, they eliminate the nuisance of receiving small cash dividend payments. Second, some DRIP plans let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many DRIP plans also allow optional commission-free share purchases on a monthly or quarterly basis.

DRIPs let you reinvest your dividends in the company’s shares without paying brokerage commissions, though service charges may apply. In column six below, we tell you if the company offers the 5% discount on market prices when you reinvest dividends. In column seven, we tell you if the DRIP has a cash option that lets you invest cash along with your dividend (5% discounts don’t apply to these purchases).

To participate in a dividend reinvestment plan, you have to buy one or more shares of a company’s stock, and get a certificate registered in your name. Registration can cost $40 or more per company. Then you call or write the company to ask for the form you fill out to enroll in the plan.

Remember, you still have to report and pay taxes on your dividends even if you reinvest them in the issuing company.

Be sure to save all correspondence and documentation related to a DRIP. You will need it to complete your tax return if you sell any shares acquired through the dividend reinvestment plan. Every purchase represents a part of your cost base. If you lose any of those records, you may not be able to account for your full cost base. If you buy DRIP shares at higher prices over time, your cost base will rise, lowering your eventual taxable capital gains. But if you can’t account for the higher cost base, you’ll pay more capital-gains taxes that necessary.

Since you’d only go into a DRIP with long-term intentions, it’s all the more important to choose high-quality stocks and spread your DRIP holdings out across most if not all of the five main economic sectors.