What in the world is a DRIP?
By Daniel Jimenez • Bankrate.com

So you're dying to buy some stocks, but you just don't have much cash right now. Relax, mon ami (that's French for "Warren Buffett wannabe"). There's a way to get on board the investment gravy train with just a scratch. It's called a DRIP, or Dividend Reinvestment Plan.

DRIPs are company-sponsored plans that allow shareholders to reinvest their dividends (the cash a company sends you every quarter) in additional shares of the company. Instead of getting a dividend check, your money goes toward buying additional shares directly from the company. Buying directly from the company means that investors can also buy more shares (or fractional shares) for as little as $10 because there's no middleman and no commissions. Hundreds of companies already offer DRIPs, including such big names as Pfizer Inc. (NYSE: PFE), AFLAC Inc. (NYSE: AFL), Xerox (NYSE: XRX) and General Electric (NYSE: GE).

DRIPs are popular with long-term "buy-and-hold" investors because buying the stocks is such a slow process. The shares are registered in the name of the investor, but the company buys the shares and sends out shareholder account statements. Businesses love DRIPs because they ensure that the capital remains inside the company rather going toward dividend payments. The companies also get to raise cash without having to hold an initial public offering.

There are a couple of drawbacks to DRIPs First, you're only allowed to buy additional shares during the scheduled Optional Cash Purchase periods, which can be once a month or maybe even quarterly. Also, running a plan can get expensive, so some companies have started charging commissions on these shareholder purchases and reinvestments.

The other drawback is that brokers don't want to bother with you if you're only looking to buy one share just to get your DRIP started. Call your broker with a request to buy a single share and expect less attention than a roasted pig at a bar mitzvah. Brokerage houses do offer DRIP accounts, but you'll need at least $1,000 to start an account. However, you can sidestep this problem by joining one of the low-cost plans offered by investment groups like the National Association of Investors Corporation and First Share, which help investors participate in DRIPs. Both of them provide lists of companies offering DRIPs. Netstock Direct is another good source for researching DRIPs.

Once you've identified a company you're interested in owning over the long haul, the next step is to check out their prospectus and plan enrollment form. Get that information by contacting the company's investor relations department or the transfer agent, the group hired by the corporation to maintain shareholder records. Find out how often you'll be permitted to reinvest dividends or buy additional shares.

Also, learn whether the company issues new shares for your contribution or buys them on the open market. Buying them on the open market is the preferred method because new shares dilute the stock's value. Finally, find out whether the DRIP is being run by a bank or by the company itself. Banks tend to tack on extra fees (who would've thunk it?), so avoid them if possible. If all goes well with your DRIP, the company will buy the shares back from you when you're ready to sell.

You'll probably want to thank the person (ahem!) who made your fabulous fortune possible. I don't really do this for the money, but I do accept cash, checks or money orders. God bless your generosity.

-- Posted: Feb. 16, 2000