The ins and outs of … Dividend Reinvestment Plans

Article Excerpt

Some companies offer their shareholders dividend reinvestment plans, or DRIPs, which allow investors to receive additional shares instead of cash dividends. For a number of reasons, we think DRIPs are a good way 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 too many investors choose stocks solely because of a DRIP. The availability of a reinvestment plan should be viewed as a bonus and not as the sole reason to invest. The advent of low-cost discount brokerages and online investing has slashed commission costs. That means DRIPs are now less of an advantage than they used to be. Remember, too, that taxes are still…