DRIP Investing is a rainmaker, kind of like late spring season in the U.S.: the time of year for the drip-drip-drip sound of rain falling gently off the roof–SO very different from the early spring dramatic rainstorms with rolling thunder and laser-like lightning.
What Is DRIP vs. DSPP?
DRIP offered by a corporation that allows investors to reinvest dividends by purchasing additional shares or fractional shares
DSPP investment service that allows individuals to purchase a stock directly from a company, via a transfer agent, or through a brokerage firm
What does DRIP mean in investing terms? In the stormy world of finance, DRIPs and DSPPs are some of the safest bets you’ll find. A DRIP (Dividend Reinvestment Plan) is a plan offered by a corporation that allows investors to reinvest dividends by purchasing additional shares or fractional shares and a DSPP (Direct Stock Purchase Plan) is an investment service that allows individuals to purchase a stock directly from a company or via a transfer agent or brokerage. For purposes of this article, the two are intermixed.
Automatic, DRIP Investing Is a Good Way
What is DRIP Investing? If you have a DRIP/DSPP, and you add money regularly and let it build, congratulate yourself! You are participating in easy investing at its best – regularly buying common stock on the cheap and reinvesting the dividends – buying stock directly from a company or via some kind of agent, but with no broker fees… making money while you sleep. A popular DRIP stocks list includes Microsoft (MSFT), Johnson and Johnson (JNJ), and ExxonMobil (XOM). Other direct investment plans can be found at directinvesting.com.
Is DRIP Investing a Good Idea? Yes, If You Like Low Excitement, High Returns Over Time
Some years’ back I opened a few different DSPP accounts with some extra cash, and I have been adding to these accounts every month. Like any good form of automatic investing, I didn’t even miss the money – in fact, I never saw it; it was swept in from my brokerage cash account. (To open a DRIP account, see the individual company’s site on how directions for how to start a DRIP account for their stock.)
Contact their Investor Relations if you have issues opening the account. Every few months I checked in to see how the stock is doing. Unlike my 401(k) which looks like a trailer park after a twister, my DSPP accounts have been chugging along beautifully. Nothing flashy, just simple dollar-cost averaging and a time horizon long enough to allow for the dividend reinvestment programs to start doing their compounding magic.
Smaller IS Better: How To Start DRIP Investing
To buy small amounts of stock cheaply and regularly, you do not have to have a DRIP/DSPP account, but it helps. If you are sure you want to invest in a DRIP/DSPP plan (see the cons of dividend reinvestment below), be sure to check out Computershare DRIP Plans (called Direct Stock). They make it easy to find a DRIP/DSPP plan, and they also service most of the popular DRIP/DSPP plans mentioned above.
Make it Rain Dividends
What makes dividend reinvestment programs so attractive?
- Dollar-cost averaging. Buying regularly over time through up and down markets.
- Easy diversification for smaller portfolios.
- Shares are often cheaper than current market value. An investor can usually acquire additional shares at a discount of up to 10% off the stock’s current market value.
- Transactions are less expensive. Either no fee or very low transaction fees when purchasing shares.
- Flexible investment minimums (or no minimums at all).
DSPP vs. Sharebuilder – A Little Fee Experiment
When I first started out with DRIP investing, I did an experiment comparing the British Petrolem (US ticker symbol BP) DSPP and what I would have paid had I invested the same small amounts using Sharebuilder (this was before Sharebuilder was purchased ING Direct) to Buy GE (a popular DRIP plan at the time).
I used BP as an example even though it is not necessarily typical since it is not a U.S. stock, but because it has turned out solid, consistent dividends, which qualifies it as a good “share builder” example (BP is on the International S.A.F.E. 10 List, meaning, it is an international stock with an above-average DividendRank, a strong dividend yield of 6.3%, and an excellent track record of at prior five years’ dividend growth).
The BP DSPP uses JP Morgan as its American Depository Receipt or ADR (an ADR is needed to hold a non-U.S. stock that trades in U.S. markets like BP). The BP DSPP came out ahead of Sharebuilder, but not for every individual purchase instance. Splitting hairs? I don’t think so, if you are investing for the long term.
DRIP Finance and the Fee Fine Print
Looking back at the records for the BP DSPP, to be fair it was hard to figure out why the commission varied from purchase to purchase (generally charged from $2 to $3.50 per purchase, and the initial purchase cost $15 in fees). It is especially impressive how cleanly and simply JP Morgan handles the ADR paperwork and how the site is very easy to use.
The GE Stock Direct Plan used BNYMellon, and crashed often when I tried to log on to track my dividends. To keep track of your dividends, you might want to use a quality DRIP investing calculator.
Every Silver Lining Has a Cloud (the Pros and Cons of DRIP Investing)
Do you have to pay taxes on DRIPs? Yes, you do. To quote May Kay Ash, every silver lining has a cloud. You should be aware ahead of time of the pros and cons of DRIP investing. There is a downside to DRIP/DSPP – you have to be able to handle the paperwork. You have done away with the middleman-broker, at a cost to you – it is up to you to file your gains with the IRs properly and you have to track the cost basis of your investment yourself for tax filing.
There are the cons of dividend reinvestment. Also, instead of a flat fee when you eventually sell the stocks, DRIPs usually charge a fixed fee plus per share based commission. This means you will pay more when you sell your shares than when you pay using a discount broker.
Be sure to pick high-quality dividend stocks for your DRIP/DSPP. Not all companies offer DRIP/DSPP options, you will need to research the right DRIP investing companies. The Motley Fool and MSN are excellent resources for DRIP and DSPP research; for example, see this article on Making $200 in Monthly Dividends.
DRIP/DSPPs give you an easy way to invest and not lose any sleep, or hopefully your shirt, for that matter. Can DRIP make you rich? That depends on you, how much you invest, and crucially, how long you let it rain.
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Disclaimer: All the information provided above and on this site is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.