Introduction to Dividend Reinvestment Plans DRIPS
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Ben Moreno in Dividend Reinvestment - 3 Comment
Dividend reinvestment is simple. You buy shares of the stock. The stock pays a certain amount in dividends, which are cash payments back to the share holder. These payments are automatically reinvested into the stock to buy more shares. As time goes by you will own more and more shares of the stock automatically.
Lower Fees – Dividend Reinvestment Programs or DRIPs are programs that allow you to purchase shares of a stock directly from the company. The dividends are then reinvested automatically over time for you. By purchasing stock directly from a company you can avoid trade commission fees that you would pay on every trade you make through a brokerage. DRIPs may still have fees however, but they will be overall less than having to pay brokerage fees on top of them.
Not all companies offer dividend reinvestment plans. Here is a list of popular companies that do offer plans and links to their DRIP program pages for your convenience. Let me know if any links are broken so I can fix them.
These companys are leaders in their industries with very strong products. Investing in these companies is quite safe because they have very strong brand names that are used all over the world. They also pay dividends back to their shareholders and have a steady historical track record of stability.
For example, did you know that Johnson & Johnson has increased it’s dividend every single year for the last 25 years! That is quite impressive and makes for a sound investment over the long term.
Passive Revenue – Investing in these programs can bring you some decent income over long term This is true passive income because you can make an intial investment and watch the stock grow over time without having to do anything else. What if you wanted to take the dividends as steady income now? You could certainly do so through an online brokerage. You will have to make a larger initial investment in order to have enough shares to earn a decent quarterly payout. It would probably be better if you used these investments as supplimental income and invested more now in monthly dividend payers instead.
Always remember, stock investments are not guaranteed and could lose value. Some are just less likely to do so than others.
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3 Comments on this post
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Laura-Whateverebay said:
This is great information. I would like to invest directly vs using a broker. My son has recently asked about the market and how it works etc.. This will make an excellent study. Thanks
January 21st, 2009 at 10:19 pm -
Ben Moreno (Who am I?) said:
Laura,
You are welcome! When I first learned about this I was excited too. However, I still use a discount brokerage because Money Paper only deals with DRIPs. I plan to use the dividend payers for stability in my portfolio but throw in some small cap, high risk/growth stocks in there.
3.2 January 21st, 2009 at 10:26 pm -
H-Town (Who am I?) said:
I’m a big fan of dividend reinvestment. I use ING’s sharebuilder and have all of my stocks reinvesting their dividends. First, it’s free as you pointed out so I avoid the cost of purchasing the stock. Second, it’s great to know that I’ll be getting even MORE money/stock in the next quarter.
Overall, great post, and a great concept.
2.5 February 1st, 2009 at 3:28 pm