One of the easiest and most affordable ways to build an investment portfolio is through a program called the dividend reinvestment plan (DRIP). This low-cost way of buying stocks allows you to purchase just one share of a company’s stock.
AT&T, Carnival, Costco, Disney, Dunkin’ Donuts, Home Depot, Pepsi, Wal-Mart, McDonald’s all have DRIP programs. In fact, over 1,000 companies and closed-end mutual funds allow investors to buy single company shares through DRIPs.
Becoming A DRIP Investor
Once you have identified a company with a DRIP, you generally have to become a shareholder of record to enroll. You must have the stock registered in your name, not a brokerage or “streetâ€ name.Â After your initial stock purchase through a broker, additional shares can be bought directly through that company.
Once you are a shareholder of record, contact the investors’ relations or shareholder services department for a prospectus. The prospectus provides all the details about the program, including any fees; optional cash payment minimums and maximums; investment dates; and eligibility requirements. Chances are the company will probably contact you once it has your name as a registered shareholder.
Keep in mind that investing in DRIPs limits your flexibility a bit. For example, shares are sometimes purchased weekly but in some plans only once a month. Let’s say you like a stock at today’s price. By the time the stock is purchased with your optional cash payment, the stock may have risen in price.
Buying Fractional Shares
Most DRIPs permit investors to send in an optional cash payment, which could be as low as $10. This enables you to purchase additional shares. For example, if a company’s stock was trading around $50 and you sent in only $25, you’d receive a fraction of a share–in this case, 1/2 of a share. But these fractional shares continue to build over time.
Rather than pay out dividends, DRIPs automatically reinvest your stock dividends to purchase more company shares. Even better, many companies offer discounted shares through DRIPs, taking 3% to 10% off a stock’s trading price. This enables you to accumulate a growing number of shares of a company’s stock, without paying high commissions.
There are several resources for anyone interested in DRIPs. The best source to keep up with the latest DRIP information is the publication DRIP Investor. What’s nice about the DRIP Investor beyond general guidance is that it provides regular updates on DRIPs worth looking into as investments.