Dividend Reinvestment Programs
Dividend Reinvestment Programs. Long-term wealth accumulation strategy that works even in times of turbulence.
Definition of Dividend Reinvestment Plan (DRIP)
Dividend Reinvestment Plans are the basis on an investment strategy where company dividends are invested in additional shares of company stock rather than being paid in cash. This is a long-term strategy for the accumulation of stock assets.
What are Dividend Reinvestment Plans?
DRIPs are a form of direct investment by individual investors in companies, bypassing the traditional stock brokers and investment firms. This helps to avoid commissions and management fees usually associated with mutual funds, and is an excellent tool for those seeking to buy stocks for the long term.
In order to accelerate your path to wealth, you can make more money by reinvesting the dividends you have received. This way, you will be able to best take advantage of the power of compound interest to grow your wealth.
Direct Stock Purchase
Dividend reinvestment plan question: how do you bypass the middleman with DRIPs? Direct Investing allows you to buy both the initial investment and the reinvested dividend shares directly from the company or its transfer agent. Thus, you can bypass the brokers altogether and avoid having to pay commissions. These direct investing strategies are also known as Direct Enrollment Stock Purchase Plans or Direct Stock Purchase.
Benefits of Dividend Reinvestment Plans
In summary, here are the main benefits of DRIP investing, as suggested by Fisher:
DRIPs allow small investments (or large investments if the investor is financially capable) to be invested regularly in a diversified portfolio of stocks that will grow into much larger amounts of money in the future.
DRIPs increase long-term investment returns. The increasing dividend and the strategy of dollar cost averaging (discipline of regular stock purchases regardless of stock price) help accumulate long-term assets quickly.
Save on fees
DRIPs save on fees. Dividend Reinvestment Programs save the cost of brokerage fees, hidden costs of mutual fund management fees, and ‘phantom’ capital gains taxes commonly associated with mutual funds. When a mutual fund sells a position for a gain, the capital gains tax liability is passed onto all fund investors and will be reported to the IRS as taxable capital gains. Since you have little control over this, this is also known as ‘phantom capital gains tax exposure’.
Disadvantages of Dividend Reinvestment Plans (DRIP)
Fixed buying dates
DRIPs trade shares on a specific date regardless of a market price. Should the DRIP follow a weekly, monthly or quarterly schedule, it will be adhered to like clockwork with no regard for current market conditions. That means that you cannot time the markets in anyway, or attempt to buy shares only at specific predetermined prices.
Long term only
Dividend Reinvestment Programs are unsuitable for those looking to invest only in the short-term. Trend traders or cyclical traders should avoid DRIPs. Shares prices will fluctuate in the short term and possibly even decline, but both dividends and share prices will rise in the long term. Investing in DRIPs requires a long-term investment commitment to a company’s management.