DRIP stands for Dividend Reinvestment Plan. As the U.S. Securities and Exchange Commission notes, DRIPs allow investors to reinvest dividends in a company's stock, as opposed to taking them in cash. Another key upside to a DRIP, particularly for small investors, is that they allow you to contribute small amounts of money initially, and over time. Because there are numerous ways to get into a DRIP, and variations on the concept, you must consider several factors prior to investing.
Research stocks that pay a dividend to decide which one you want to invest in. Many financial websites provide detailed stock quotes that note whether or not the stock pays a dividend. Look for the amount of dividend next to the abbreviation "Div." If a company's dividend is $1.00, shareholders receive $1.00 annually for each share of the stock they own. Generally, companies pay dividends on a quarterly basis; therefore, in this example, the shareholder would receive $.0.25 per share, four times a year.
Purchase at least one share of the stock you wish to invest in. To get started in most DRIPs you need to own at least one share. You can buy one share of stock from companies who specialize in this practice. These companies then automatically enroll you in the DRIP of the company you purchased one share of stock in. To execute this process, you buy the share and fill out some paperwork, usually online. The company facilitates the process of enrolling you in a firm's DRIP.
Review the terms of the DRIP you have been enrolled in. You will receive details about the plan via email, snail mail or both. Meet the plan's minimum initial investment. One advantage of most DRIPs is that they have low initial minimums, often as low as $0 to $100. Some initial minimums are higher. You can fund a DRIP like you do most other investment accounts, via check or electronic bank transfer.
Set up an automatic investment plan. You can elect to have money transferred automatically from your checking or savings account, to invest in new shares of the company whose DRIP you are enrolled in. The beauty of a DRIP is that the minimum monthly amount is usually low, often around $50.
- Some companies offer Direct Purchase Plans (DRPs). DRPs allow investors to cut out the middle man and buy the first share of stock directly from the company offering the DRIP. DRP rules and criteria, such as minimums and fees, vary from company to company, notes the SEC.
- As an alternative to DRIPs, some brokerages allow you to reinvest dividends that you receive from shares of stock you own, back into more shares of the stock, for free. Some of these firms offer comparatively low trading commissions, and specialize in catering to small investors who can only invest a small amount each month.
- Of course, you can always secure the initial share of a stock to qualify for a DRIP from a traditional stock broker. Generally, this approach results in high commissions relative to using a service that specializes in buying first shares, finding a direct purchase plan, or using a brokerage that focuses on small investors and automatic monthly investing.