People invest in stocks due to varying reasons. Some are trying to make money from capital gains, while some prefer a steady income through dividend stocks. There are also investors who invest in dividend-paying stocks, but opt to automatically reinvest their dividends in order to purchase more stocks and presumably earn more dividends in the future. This is done through a DRIP or Dividend Reinvestment Plan.
What are DRIPs?
DRIP stands for Dividend Reinvestment Plan, which is an investment plan that allows an investor to reinvest his or her dividends by purchasing more shares on the dividend payout date. Availing for DRIP lets an investor to automatically purchase more investments at a lower cost.
Read more about generating profits from dividend stocks.
How do DRIPs work?
Basically, an investor who wants to make use of DRIP investing must own at least one share of the company’s stock first. They can set up the DRIP by calling the said company to avail for DRIP enrollment. The company itself would direct the investor to a transfer agent or whoever needs to handle the reinvesting process. These could be a broker, transfer agent, or the company itself.
During the dividend payout date, instead of receiving a small dividend check, the agent would reinvest the money into the same stock and purchase more of its kind. It could be individual shares or even a fraction of a share, depending on the amount reinvested.
Through DRIP, investors usually do not need to pay the highest or the lowest price for the shares. Instead, the price for the shares is determined by computing the average costs of the share price over the given time.
The fees needed to purchase a stock through DRIP are usually small, if there are any. Many dividend reinvestment plans are often a part of a direct stock purchase plan, which automatically debits the purchase of the additional shares from the investor’s account, usually at no additional cost.
For investors who are looking to accumulate more dividends in the future, maybe save it for retirement, then this is the best plan for them. A dividend reinvestment plan is for long term investors. It gives the opportunity to significantly increase the initial investment by sacrificing what little amount you can get now, in order to receive more dividends in the future. Thus, it is a fool proof plan for saving money in a systematic way.
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