Investing Through DRIPs

What Are Dividend Reinvestment Plans (DRPs)?

Drip Investing

Companies offer DRPs as a way for their shareholders to buy stock directly from the company (usually through a transfer agent) in very small to large amounts, and usually on a monthly basis if desired. These plans get their name from the fact that they also reinvest dividends paid, using these dividends to purchase more stock. Thus the name "Dividend Reinvestment Plan." The specifics of whether or not you have to reinvest the dividends depends on the plan.

Advantages of DRPs

  • You don't need a large amount of money to start. Usually owning one share is all that is required to enroll in a DRP.
  • DRPs are a cost-effective way for Fools to put stock dividends to better use -- purchasing more shares of the company -- than simply spending the money or having it sit in a money market account. Most DRPs allow dividends to be reinvested at no fee.
  • Most companies allow investors to purchase additional shares through a Dividend Reinvestment Plan for nominal fees -- or often no fee at all. These stock purchase provisions, sometimes called Stock Purchase Plans (SPPs) or Optional Cash Purchase Plans (OCPs), allow an investor to send in as little as $10 to $50 at a time to purchase additional stock.
  • About 100 companies have DRPs that allow investors to purchase stock at a discount to the current market price. These discounts can range anywhere from one to ten percent.
  • DRPs "force" investors to buy stock on a regular basis and hold on to that stock. As a result, investors adopt a long-term horizon and often invest small amounts of money on a regular basis -- money that they usually don't even miss. Nearly 200 companies also offer the option to make periodic DRP investments through automatic debits from bank accounts.

Kinds of DRPs

  1. Company-run: Many companies take it upon themselves to run their own DRPs. These are often the companies that allow you to buy directly through them without requiring you to first own a single share, although this is not always the case. The company-run DRPs are administered from corporate headquarters, normally as part of the overall shareholder relations effort. Some companies may even offer Individual Retirement Accounts (IRAs) along with the DRP.
  2. Transfer agent-run: As managing DRPs can be cumbersome, most companies have turned to third parties, called "transfer agents." Transfer agents are financial institutions that run DRP programs for many companies. Because they can use the same resources for a number of customers, transfer agents can often provide DRP management services at a lower cost than the company could achieve by itself. Some of the larger transfer agents include Boston EquiServe, L.P., First Chicago Trust, and Chase Mellon.
  3. Brokerage-run: Some brokerages will allow shareholders to reinvest dividends at no cost, even if the company in question does not have a formal DRP itself. However, these brokerage-run "simulated" plans apply to dividends only and do not permit optional cash purchases as most company-sponsored DRP plans do -- and optional cash purchases are a large part of what makes DRP plans so attractive. (click here to compare the offerings of several different brokers).

Summary

DRPs are a way to begin investing with a very small amount of money and to keep investing monthly (or as frequently as you can afford) in small or large amounts while avoiding brokerage commissions and reinvesting dividends. In the long term, it's a great and "patient" way to grow money. You have dollar-cost averaging working for you and you're investing, ideally, in great companies that you don't foresee selling at any time. That's very Foolish.

Next: Starting a DRP »