Reinvestment plans can help you to get a jumpstart on investing early in life. Because they reinvest dividends, your equity will increase exponentially over time provided that your investments turn a profit. When you consider a dividend reinvestment plan, consider both standard dividend reinvestment plans (DRIPs) and opt-out dividend reinvestment plans and choose the one that's right for you.
When you invest in a DRIP, any dividends that your investments pay out go back into the company instead of into your pocket. This doesn't mean you're giving the company a gift — the dividend simply increases your investment in the company. This means that your shares in the company will increase over time as long as it pays a dividend.
Opt-out dividend reinvestment plans are similar to DRIPs. When a dividend is paid out in an opt-out dividend reinvestment plan, the board of the directors can decide that the dividend is to be reinvested into the company by default. The difference is that it is possible to opt-out of the reinvestment, and to receive your dividend in cash instead. To do this, you must inform your stockbroker or notify the transfer agent directly.
The primary advantages of DRIPs is that they are automatic. Whenever a dividend is issued, it is automatically converted to additional stock, so you don't have to decide whether to reinvest. This is particularly good if you have several small stakes in a number of companies and can't be bothered to spend time making constant decisions about them. Importantly, DRIPs also allow you to avoid broker fees that you would encounter when investing on your own. Additionally, DRIPS force continual investments into the company whether its price is up or down, which -- in effect -- causes you to buy more when the price is down and less when it is high.
The primary advantage of an opt-out dividend reinvestment plan is the element of choice. If you believe that the stock shows promise, you can opt to allow your dividend to be reinvested. But if you are concerned about the stock, you can simply take the money and run. It also gives more flexibility to you if you have changing financial needs — when you are in investing mode, you can double down. However, if you need the cash for other life needs, you have that option.