Dividend reinvestment plans, or DRIPs, allow investors to buy stock directly from the company and automatically reinvest dividends. While the process isn't free, it can be low cost.
Temper Enrollment Service at retirement planning.. Principal Vita Nelson is a DRIP evangelist. She is a particular proponent of DRIPs for young people committed to
"They can start out with a single share of stock and build wealth in the most efficient way possible over a long period of time. They can buy stock in 10 or 15 companies, so they have a diversified portfolio," says Nelson.
As an example of the power of DRIP investing, a little more than 25 years ago, Nelson and her staff put together a portfolio of 20 companies -- mostly utilities -- from the 1,300 or so companies that sell stock through DRIP plans. She says her companies invested $100,000 in these stocks. By 2013, with no additional investments other than reinvestment of the dividends, the value of the portfolio had risen to about $1.02 million. Not bad.
Not everybody is as enthusiastic as Nelson about the power of DRIPs. Bankrate's investment expert Dr. Don Taylor says that there are better deals in this age of online brokers with rock-bottom commissions. But Nelson believes that this method can be a big winner for people saving for retirement who don't have much money to invest. "People without discretionary income tend not to save at all," she says. "Here you get dividend income, and you can count on long-term appreciation of your holdings."
"My kids don't bother investing in DRIPs," the 76-year-old grandma admits. "But my grandkids do. They're interested. It's very gratifying."