Dear Dr. Don,
How do I find out more information about dividend reinvestment plan, or DRIP, investing?
— Con Compounding
Dividend reinvestment plans are an easy way for an investor who owns shares of a company stock to reinvest the quarterly dividend payments paid by that company. I own some shares of Campbell’s Soup stock and have the dividends reinvested. The dividends are taxable income in the year paid, so there’s no tax savings. It’s just a convenient way to reinvest the dividend payments and keep the money invested.
DRIPs aren’t just for reinvesting dividends. Investors also can use DRIPs as a way to accumulate shares of a company’s stock by purchasing them directly from the firm. This may eliminate the need for a stockbroker and a brokerage account.
Since it’s common for a company to require that an investor own at least one share of its stock registered in the investor’s name before the investor can participate in a DRIP, the investor has to find a way to own that first registered share. It’s also common for a company to charge a fee from the investor to participate in its DRIP, although not all do.
There also are firms that offer a no-load option, meaning investors can buy that initial share directly from the company. These firms have minimum initial purchases, which can range from $50 to $1,000. The home run for a DRIP investor is a firm that offers a no-load initial purchase, free dividend reinvestment and a discount on the stock price, although the discount is taxable income to the investor. Those firms are quite rare.
I’m not a fan of DRIP investing for purchasing shares of common stock in a company. In a world of online brokers with rock-bottom commissions, there just isn’t the need to participate in a DRIP and manage multiple investments with individual firms’ DRIPs.
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