Dividend Reinvestment Plans (DRPs -- or what we call Drips) allow you to buy shares of stock directly from companies in nearly any dollar amount (including fractional shares) either without commission or for very low fees. More than 1,300 companies offer these plans -- most by large companies that pay dividends.
There are two kinds of dividend reinvestment plans:
- Direct Stock Plans (DSPs) allow investors immediate enrollment in a company's direct stock purchasing and dividend reinvestment plan. Usually these plans require you to buy $250 or more in stock to start, direct from the company. From that point, you may buy as little or as much stock as you like, for zero or low commissions, and have your dividends reinvested.
- Dividend Reinvestment Plans (DRPs) usually require investors to already own at least one share of stock in order to enroll in the plan. The initial share needs to be purchased from a regular broker or a third-party company catering to DRP needs. The stock needs to be registered in your name before you may enroll in the company's DRP. Once enrolled, as with a DSP, you may buy stock regularly and have dividends reinvested.
Both types of plans work similarly once started. DSPs are just easier to start than DRPs. Which type of plan you'll use depends on the plan offered by the company you choose to buy.
These plans are best to use when you want to invest small amounts of money in individual companies on a regular basis (such as monthly), and when you find a company plan with free purchases and dividend reinvestment. All plans charge a nominal fee for sales, but some plans also charge fees for purchases and even dividend reinvestments. In these cases, you may be better off using a discount broker instead. Compare the costs.
One key advantage of using DRPs or DSPs is dollar-cost averaging. If you add the same amount of money to your investments every month, you'll automatically buy more stock when prices are lower, and less when prices are higher, giving you a better average price per investment.
These plans are also of great advantage if you only have a little money to invest and wish to invest every month. Commissions at regular discount brokers might eat your principle. Free DRPs and DSPs allow all your money to work for you. Check 'em out.
All about Direct Investment Plans
From the Fool's School, an overview of the different types of plans, the history behind them, and how to open one.
Companies to Consider
A guideline of the type of companies we favor when opening these investment plans.
DRPs and Taxes
How to account for taxes when using DRPs or DSPs.
Past Example Portfolio
From July 1997 to February 2003, the Fool ran a real-money portfolio employing a direct investment strategy. It was called the Drip Portfolio (because we dripped money into stock regularly and used DRPs to do so). All Drip Port's past columns are archived.
Alternatives to DRPs and DSPs
If a company you're interested in doesn't offer a low-cost plan, or any plan at all, there are alternatives like ShareBuilder, which charges low commissions per investment and allows fractional share purchases. Also, look for the best deal among discount brokers.
