SNAPSHOT: DRIP Investing
How It Works:
Companies offer DRIPs, allowing individual investors to purchase shares directly from their transfer agent, thus bypassing brokerage houses—and brokerage fees. Most require a small minimum investment, and some charge a low fee for transactions, but many charge no transaction fee at all. Most allow dividends to be automatically channeled into further stock purchases, thus compounding your portfolio’s assets. Some offer their shares at a discount, making DRIP investing even more attractive.
- Low Cost of Entry: Sure, you can buy a single stock with a brokerage account, but even a discount broker will charge you at least $7 for the trade, and then another $7 when you sell, meaning your single share must make $14 of profit just to break even. But it’s easy to buy a single share with a DRIP, and there are no brokerage fees to eat into profits.
- Greater Safety: Because you can buy shares in very small amounts, you can more easily diversify even a modest portfolio. You also reduce your risk by buying shares gradually over time, rather than all at once, a strategy called dollar cost averaging.
- Instant Profits: If you choose discount DRIPs, you’ll be in the money from the moment you buy your shares.
- Long-term strategy: You can get out of a plan at any time. However, it doesn’t make sense to get into a DRIP unless you plan to leave your investment in place for a fairly long time. You won’t get the benefits of DRIP investing, and it may even cost you, depending on the setup fee.
- Some study required: You invest in a DRIP based on its long-term prospects, not today’s stock price. Before you make this kind of commitment to a company, you should spend a little time checking it out.
- Less excitement: You’re allowing the stock market to work for you, not “playing” the market. So, while you’re protected from wild price fluctuations, you also cannot take advantage of those fluctuations, as day traders try to do. (Many day traders lose money, but they do get more entertainment out of watching their portfolios than DRIP investors do.)
Who Should Invest:
DRIPs are a good idea for nearly every investor. They’re a perfect investment if you’d like to use small sums to build a strong portfolio over time, especially if you’re willing to do a little initial research. Once you get started, they’re a classic set-it-and-forget-it investment whose value will grow while you’re busy doing other things. They also allow you to continue adding to your investment in small increments, and some of them let you do this automatically. DRIPs are a great choice for a long-term investment.