Friday, March 28, 2008

DRIPS

What is a DRIP?

DRIP stands for Dividend Reinvestment Plan. There are 3 different types of DRIPs however they all work on the same principle, instead of shareholders receiving dividend payouts in cash they receive their dividend payout in the form of more company shares.

3 basic types of DRIPs

Company Run
This type of DRIP is administered directly through the publicly traded company. Fractional shares are permitted in this type of DRIP meaning that if you receive a quarterly dividend of $1 and the share price is $5 you would receive an additional 1/5 of a share. Additionally, many company run DRIPs also provide shareholders some incentive for staying enrolled ie – 3% bonus to the regular dividend. Company run DRIPs also usually offer a Share Purchase Plan which is a plan that allows investors to buy additional shares with no commission.

Transfer Agent-Run
For the shareholder this type of DRIP is the same as a company run DRIP. Transfer Agents are employed by companies to streamline their DRIP process and reduce the administrative costs associated with running a DRIP. Transfer Agents run DRIPs for a many customers and as a result can run offer the same program to multiple companies using the same resources resulting in lower costs.

Brokerage Run
Many brokers will now allow customers to reinvest their dividends at no cost. This type of DRIP is not a “real DRIP”, it is more of a service that the brokers provide to their customers and is often referred to as a “synthetic DRIP”. One benefit of brokerage run DRIPs is that they will allow you to DRIP many companies that do not even have a formal DRIP program. This allows investors to now DRIP virtually every blue chip company on the US exchanges. Although synthetic DRIPs have really expanded the number of drippable companies they do have a few drawbacks. The first of which is brokerage run synthetic DRIPs do not allow for fractional share ownership, only full shares will be purchased and the remainder of the dividend will be deposited as cash into the customers trading account ie-company ABC has a $15 quarterly dividend and a $10 share price, this would result in the customer receiving 1 share of ABC and $5 cash instead of 1.5 shares. The second drawback of brokerage run DRIPs is that share purchase plans are not available. If you want to buy additional shares you have to pay the regular commission price of your broker.

6 comments:

dividend growth said...

Thanks for sharing this article with us your readers!I featured this article in my periodic blog reviews.

Merryclicker said...

Sharebuilder allows reinvestment in any of the stocks they carry. No fees. Partial shares allowed, and reinvestment is allowed if you own just a partial share. If there is a dividend, they'll reinvest it.

tk77mann said...

Schwab also allows dividend reinvestment, including partial shares, for no commission or fee. I love this aspect of their service. I only use it for our IRA accounts since it is too much of a paperwork nightmare at tax time for non-IRA accounts.

a design student said...

With Sharebuilder if you have the Basic plan you have to pay $4 per Investment, or you have to sign up for one of there monthly plans. They also keep the stock in there name, not yours and if you check out there site they have a lot of service fees. The best way is to find stock that offer Direct Enrollment, you have to invest a few hundred up front but after that you are in control. There a few sites out there that offer a list of DRIP stocks.

I use Directinvesting.com, they have a full list. You can also use them of you want to get started with very little money. They have a stock of a day section, there current stock is Polaris Industries. So for about $46 I just got one share of stock and enrolled in there DRIP program. I can send them as little as $25 a month and all of that money goes into buying me shares. I don't have to worry about any fees or anything.

I thought it was to hard to get started in the stock market until I found out about DRIPs. Thanks for helping me get started.

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