The ins and outs of…Dividend Reinvestment Plans

Article Excerpt

Some companies offer dividend reinvestment plans, or DRIPs, which allow shareholders to receive additional shares instead of cash dividends. For a number of reasons, we think DRIPs are a good way for investors to slowly build wealth over a long period of time. First, DRIPs eliminate the nuisance effect of receiving small cash-dividend payments. Second, some DRIPs let you buy shares from your reinvested dividends at a 2% to 5% discount on the current share price. Third, many DRIPs also allow you to buy additional shares on a monthly or quarterly basis without paying commissions. Keep in mind, though, that while there is no harm in participating in a DRIP, too many investors select their investment ideas solely on the basis of the existence of the DRIP option. We think the availability of a DRIP is only a bonus, rather than a reason to invest by itself. Investing in only DRIP stocks limits both an investor’s investment choice and opportunity. Low-cost brokerages and online investing have slashed…