Dividend reinvestment plans (what we call Drips) allow you to buy shares of stock directly from companies in nearly any dollar amount (including fractional shares), either without commission or for very low fees. More than 1,300 companies offer these plans -- mostly relatively large companies that pay dividends, such as Motley Fool Inside Value pick Coca-Cola
It's well worth your time to learn more about them, since they're a terrific way to build real wealth slowly, with small, regular investments of as little as $25 or $50 per month. (They can serve wealthy investors well, too!)
There are two kinds of dividend reinvestment plans:
Direct stock plans (DSPs) allow investors immediate enrollment in a company's direct stock purchasing and dividend reinvestment plan. Usually, these plans require you to start off buying $250 or more in stock, directly from the company. From that point, you may buy as little or as much stock as you like, for zero or low commissions, and have your dividends reinvested.
- Dividend reinvestment plans (DRPs) usually require investors to already own at least one share of stock in order to enroll in the plan. The initial share needs to be purchased from a regular broker or a third-party company catering to DRP needs. The stock needs to be registered in your name before you may enroll in the company's DRP. Once enrolled, as with a DSP, you may buy stock regularly and have dividends reinvested.
Both types of plans work similarly once started, but DSPs are easier to start than DRPs. Which type of plan you'll use depends on the plan offered by the company you choose to buy.
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