Making Money With DRIP's
by Joe Chapin
Around ten years ago I was looking for a place to invest a little bit of cash. I didn't want to pay huge commissions and I wanted to own stock. I did a little research and ran across something called a dividend reinvestment plan (DRIP). It seemed too good to be true. Small investment………no commissions….IRA's….WOW, sign me up. That is how my love affair with the DRIP began. I have been investing in various DRIP's ever since.
More and more companies are offering DRIP's and Direct Purchase Plans (DPP's). With a DPP you may purchase stock directly from the company, bypassing most of the high commission fees of a broker. While some plans charge a setup fee, it is normally minimal. Quality companies such as Home Depot, General Electric and Exxon offer DPP's. A large number of these plans have an initial investment of $300 or less with additional investments as low as $10.
DRIP's are similar to DPP's with the exception being that DRIP's require that you be an existing shareholder of the company. Again, you can bypass the broker by purchasing your initial share through a program offered by a service such as the one offered by "The Moneypaper". For as little as $15 they will purchase the first share for you.
In addition to not having to deal with a broker these plans have many great features. First, all of your dividends can be reinvested which allows your money to grow even faster. Companies such as Exxon, Ford and Bell Atlantic allow you to open IRA's within their plans. This allows for a simple way to fund your retirement at your own pace. These plans are also a great way to practice dollar cost averaging, which allows you to buy fewer shares when prices are high, and more shares when prices are low. There are even some plans, which sell you shares at a discount, thus improving your returns even more. With the wide selection of companies offering these programs, you could very easily build a DRIP/DPP portfolio diversified enough to stay invested in for a lifetime. Take a look at our Barnyard Portfolio, which is made up of DRIP and DPP stocks.
There are a couple of disadvantages to these programs, however, if you have a buy and hold mentality there really is no down side. Selling shares in these plans is done on a semi-regular basis although I suspect that in the near future these programs will allow for phone and/or internet redemptions. In many cases, the inability to sell quickly may be a blessing.
These are both excellent investment methods for either the beginning or seasoned investor.