Volatility in the stock market can be very disconcerting for the individual investor, but it can also led to substantial profits for those investors willing to buy and hold. In recent years, global economic turmoil has left the price of many stocks trading at a fraction of their all time highs. While the recent declines in the market have left many investors feeling uneasy about investing new capital, this may, in fact, be an opportune time to jump back in. Due to market declines over the last several years, dividend yields of many solid cash-rich companies are historically high. Investing new capital now allows investors to “lock-in” these great yields and position themselves for capital gains as global economic conditions improve.
Investors can maximize their return on capital over the long- term by investing in dividend paying companies through a Dividend Reinvestment Plan (DRIP). Rather than receive dividend payments, the DRIP investor chooses to reinvest, or use dividend payments to purchase additional shares of stock, often for free or for a minimal cost. As the stock price of a company fluctuates, so will the amount of additional shares purchased with reinvested dividends. If a company’s stock price has dropped your reinvested dividends with be able to purchase more shares, or fractions of shares, which is possible in a DRIP plan. If the company’s stock price rises, your dividends will purchase fewer shares, but you will be making capital gains on the rising stock price.
Getting started in DRIP investing requires you to do some research, but with internet access this is quite easy. There are many informative websites explaining in detail the ins and outs of DRIP investing. The first step to becoming a DRIP investor is deciding which company you wish to invest in. Once you have done the research and found a company you like, look at the company’s investor relations website. The investor relations website will tell you if they offer a dividend reinvestment plan, and if so, it will provide details about how the plan works. Each company that offers a dividend reinvestment plan will have different requirements and transaction costs, so read carefully to see if the plan is right for you.
DRIP plans require that you own one or more shares of stock usually purchased through a brokerage firm prior to enrolling. If you do not have a broker you may want to consider investing in a company that offers a Direct Purchase Plan (DPPs). DPPs allow the first-time investor to forgo the need for a broker by allowing the investor to purchase initial shares of stock directly from the company. Once the shares are purchased the investor can elect to reinvest dividend payments. In some cases, online discount brokers also provide free dividend reinvestment. One advantage to using a discount broker that provides free dividend reinvestment is that it is possible to engage in DRIP-style investing in companies that do not offer DRIP or DPP plans. The disadvantage of investing through an online broker is that it can be expensive if you wish to make additional cash purchases.
DRIP plans that are administered by a company or a third-party transfer agent make it easy and cost-effective to make regularly scheduled Optional Cash Purchases (OCPs). OCPs allow the DRIP investor to make small stock purchases, sometimes as little as $10.00 dollars per transaction, which allows the investor to build their position over time. Some online discount brokers that provide free dividend reinvestment also provide plans that reduce commission fees for investors that want to make regularly scheduled stock purchases. In some cases, commission fees can be as low as $4.00 dollars per trade.
While not suitable for every investor, DRIP investing can be an effective way to build wealth for those with minimal funds and a long time horizon. DRIP investing allows the investor to use dividend payments to purchase additional shares, which in turn increases the investors position and dividend payments over time. DRIP investing is a buy and hold method of investing, but it is not a buy and forget method of investing. Therefore, it is important that DRIP investors remain vigilant about their company’s financial health.