Direct Reinvestment Plans, or DRIPs for short, enable investors to purchase stocks directly from companies. DRIPs typically do not require payment of commissions or fees, and dividends are reinvested in the company’s stock. In this article, Clare from Money Energy lays out 10 key benefits of DRIPs, after first discussing the difference between full and pseudo DRIPs. Money Energy is a personal finance, global investment, and wealth building blog, so be sure to check it out and subscribe to Money Energy’s feed.
Full DRIPs and Pseudo DRIPs
First off, we need to distinguish between actual DRIPs and other plans that just contain some of the components of full DRIPs. When I refer to a “full DRIP” that means a plan that has the following options:
- full (i.e., fractional) dividend reinvestment into new shares (aka DRP) AND
- optional cash purchases of more shares (aka OCP, “stock purchase plan” or SPP)
These plans are offered directly by the companies that issue the shares themselves. If your bank or broker offers to “DRIP” a stock for you, all they’re usually doing is reinvesting the dividends in more stock, but only if you have enough dividends to afford at least one more whole share. These are not really DRIP plans. Some call them “pseudo-DRIPs” (for lack of a better term). There’s nothing wrong with “pseudo-DRIPs” if you don’t mind continuing to pay those commission fees and waiting until you have enough cash in your account to qualify for the reinvestment. But full DRIPs are faster, better, cheaper, and… better.
So let’s get to the reasons why I think you should look at DRIPs even if you do have a discount trading account where you get trades for $4.95 or less.
Top 10 Reasons To Be in DRIPs
- No commission fees: Remember, I’m talking about full DRIPs and I’m also talking about the DRIPs which don’t charge you a dime. Unfortunately some transfer agents slap on fees for reinvestment – but not all plans are burdened with this. You want to find the ones with NO FEES. There are many.
- No minimum required investment: Invest as little as $25, whenever you can afford it. And you don’t have to worry about wasting a commission fee, because there are none. At a regular broker, you’d probably want to invest at least $500 or more to make that $4.95 commission fee worth its 1% total of your investment amount. Caveat: some DRIPs do try to slap on minimum investment amounts – don’t go with these ones! There are many, many more that have no set minimum investing amounts.
- Pre-screened stocks: Just because a company has a DRIP doesn’t make it an amazing investment and it doesn’t eliminate its risk, but the fact that all DRIPs will de facto be held by companies that pay dividends is a bit of a pre-screener for you, since dividend reporting is a bit like “public proof” of the company’s profits. Companies are averse to unnecessarily lowering their dividend payouts, and in many cases a dividend payout is a sign of a more mature company that has stabilized in its industry (check: see how many small caps and start-ups are paying dividends). So while this cannot be the only screening you do (and many great blue-chips don’t have DRIPs at all), it is some indication of a company’s status.
- Transfer Agents are all online, so there’s very little paperwork involved: This used to be a complaint about DRIPs, but it’s largely no longer valid. Transfer agents like Computershare hold and collect all the information which you can view online through your account with them, much like online banking. You can download all the forms and documents you need directly from their website. So the positive side to this is you see all your DRIPs in one place. It’s not that hard to keep track of at all.
- Set up automatic “DRIPping” from your account: Put your dollar cost averaging on automatic and don’t worry about market ups and downs. If you’re already someone who’s against market timing, DRIPs are perfect for you. Not all companies offer automatic purchase plans, but some do.
- Cut out the middleman: Invest directly in the companies that your mutual funds are already in anyway. Some people like feeling that they’re paying for the wise management counsel of fund advisors. Personally, I haven’t seen any fund performance that does better than what I can do myself, and that’s not saying much. If you don’t mind reading up on a few companies – and it’s not rocket science – I think it’s better to not pay those management fees, and just invest for free on your own.
- Get a discount on your reinvestments: As if the lack of commission fees weren’t enough reason on their own, some DRIP plans even give you a discount on reinvesting your dividends. They’ll buy new shares for you at a discount to the market price. This reason should really go right up there at the top, because where else can you find such a deal? Nowhere. Sometimes the discount is as high as 5%.
- Perfect for kids, students and the self-employed: Because of the low “overhead” so to speak, it’s easy for teenagers, students and those on sporadic incomes to become regular investors. You don’t need to have a full-time high-income job to be an investor. For this reason, DRIPs are also a great learning tool that will help you ease your way into the investing world.
- Helps cultivate a buy-and-hold, investor’s mindset: Similar to the point above, DRIPs teach you about investing. Specifically, they can teach you the buy-and-hold mindset. I realize that many people might be wary of buy-and-hold values now after the crash of 2008, but even on DRIPs many of us were able to buy up more stock on those dips and hold onto it for more future dividend earnings and growth. If you’re going to be in the market long-term, DRIPs are a great place to be.
- DRIP accounts can be transferred to a brokerage account: Once you’re DRIP account balance is high enough, you can still transfer it all back into your brokerage account and receive the dividends in cash. Imagine how nice it will feel in 20 years knowing that you were able to amass tens of thousands (or more!) dollars without paying any commissions to do it. All your money was working for you.
Simply put, if a company offers a fee-free DRIP, and it’s also an excellent company that you’d want to invest in anyway, I think you’d do well to enrol in the DRIP. I’ve also put together a primer on how to get started in DRIP investing. It often amounts to free money (especially with those discounts!). If you’re not a “trader” and you’re thinking long-term, enrol in a DRIP or two for the companies you like. If you have kids, get them started in DRIPs like Pepsi or Disney. If you’ve been wanting to get into investing but haven’t yet, this is a great way to get started.