If you’ve never heard of DRIP stocks before, you’re not alone. DRIP stands for dividend reinvestment plans, and they are programs that make it possible for shareholders to directly purchase stocks from the company.
That means that investors don’t have to deal with brokers or brokerage commissions, which makes the entire process much easier to follow.
Why DRIP Stocks Are Attractive to Investors
The lack of commission fees is a very attractive quality to investors. Instead, companies do not typically charge anything when it comes to purchasing stocks directly through them. Those that do charge an otherwise minimal fee.
Company DRIPs also tend to offer discounted prices compared to market prices. This is another especially attractive attribute to investors because it means it’s another way to save money.
Some investors also prefer to deal in cash and certain DRIP stocks allow cash purchases as an option as well. When dealing in cash, some companies also give investors the option to purchase in fractional shares as opposed to complete shares.
How to Purchase DRIP Stocks
After you find companies that offer DRIPs, you’ll need to determine whether or not you need to become what is known as a “shareholder of record” to purchase them. Most companies require this, so don’t be surprised if they say you have to register everything in your name before you can become an official shareholder.
Registering your stock in your name means exactly that – it must be in your name. The stocks cannot be under a broker’s name.
Once you have registered as a shareholder of record, at that point, you can contact the company directly for an application to purchase the DRIP stocks as well as to request a prospectus.
The prospectus contains details regarding the DRIP program as well as any potential fees you might need to pay. You’ll also find out whether or not partial stock purchases are an option inside the DRIP prospectus.
The Ins and Outs of DRIP Stocks
There are a few things that investors need to know before making the jump to purchase DRIP stocks.
Most DRIPs do not have related costs, but the fees that are out there aren’t usually expensive per share. They range from pennies on the dollar to a few dollars per share if the company charges a fee.
Number of Shares
You’ll also need to know the number of shares you’ll need to officially enroll. While most plans will only require you to purchase a single share, others might need you to purchase multiple shares. You’ll want to check the company policies to find out how many they will require.
Differences Between Companies
It’s important to note that DRIP stocks vary from company to company. You’ll find that some offer monthly cash payments as an option, while others may only allow quarterly purchases. Other companies may also give you a choice to make weekly purchases.
Reinvesting Your Stocks
Certain programs do not require reinvesting the dividends, and others do. You’ll need to contact the company’s shareholder department to figure out whether or not you will have to reinvest your DRIP holdings.
Keeping Up with Taxes
Investors will receive a 1099 at the end of the year every year that gives you dividend information to take into account on your taxes. Additionally, should you decide to invest in DRIP stocks, you must keep excellent records of all transactions that will need to be reported.
DRIP investment is slower than going through a broker in most cases. In fact, if you purchase stocks with a cash option, it is entirely possible that the price you want to pay may be different when the stock is actually purchased. The same speed and possible changes are also reflected on the seller’s side, so keep in mind that DRIPs are better for long-term investments as opposed to short-term investments.
Using DRIP Stocks as an Investment
DRIPs often allow you to use cash dividends to purchase additional stock, or fractional shares, without commission fees. The lack of fees means that all of your money is going towards the shares that are being purchased.
The DRIP stocks work cyclically. If you decide to invest in DRIP stocks, you’ll be happy to know that as your stocks increase their worth, the company reinvests the dividends leading to purchasing more shares.
Over time, the more shares you have, the higher the dividends will be and eventually, you can find yourself with a fantastic return. Find companies with solid reputations for DRIP stocks, and you’ll be on your way to making smart investments, too.