The Advantages Of Dividend Reinvestment Plans

by Hank Coleman

Advantages Of Dividend Reinvestment PlansDividends are an important factor in making any investment decision. They have a significant impact on the overall return of a particular investment.

While in the short term it may not seem like you could gain much from reinvesting small amounts of dividends, over the long-term you could be missing out on significant gains from the effect of compounding interest. One of the easiest ways to maximize investments in dividend stocks is through dividend reinvestment plans, or DRIP for short. There are many advantages of dividend reinvestment plans that investors can use to purchase stock.

What Is A Dividend Reinvestment Plan

Dividend reinvestment plans have been offered by many companies for quite a long time, but they are becoming ever more popular with investors. Offered directly by the underlying company, a DRIP is essentially a method by which shareholders do not receive dividends in cash but rather in additional shares of stock.

Advantages Of Dividend Reinvestment Plans

The advantage ofdividend reinvestment plans and plowing your dividends back into your investment is that it has a significant effect on your investment returns over time. This can be found in the impact that compounding has.

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By buying additional shares in the same company you gradually increase your holding, but you also receive ever increasing dividends as your total holding not just your initial investment increase over time. In many markets and industries, this could result in returns that are more than 50% higher than if you did not opt for reinvestment throughdividend reinvestment plans.

Buy Shares Direct From The Company

Companies that offer dividend reinvestment plans generally handle the process directly, and you usually only need to fill out the relevant forms to partake in the plans. When each dividend payment date comes around, your broker is not sent a cash amount but is rather notified about additional shares that have been allocated to you. Your total share holdings continue to increase through DRIPs.

With every dividend payment, you increase your holding in the company automatically. And, the more successful a company becomes, the greater your investment grows, which helps boost your overall investment returns.

DRIPs Often Offer Investors A Discount

One of the biggest advantages of dividend reinvestment plans is that many companies often offer a discount on the official share price. This gives you an immediate leg up and a positive value of your new shares of stock. While the discounts are usually quite small, this all helps in the long-term. In addition to the discount, signing up for such a reinvestment plan greatly reduces your stock purchase costs since you are skipping the stock broker or your discount brokerage firm.

Even with discount brokers like Scottrade,, and TD Ameritrade it is generally not worthwhile for you to buy small amounts of stocks. The buying and selling fees have an immediate impact.

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For example, if you bought $100 worth of shares and paid $7 commissions to buy and sell, then the shares would have to increase by 14% just to for you to break even. This is where DRIPs become especially beneficial for small scale investors who receive only small amounts of dividends. There are no commissions and typically only very small fees involved.

Dividend reinvestment plans are by far a great way for investors to ensure that their portfolios are performing to the highest level possible while saving the investor money in commissions. By reducing costs and taking advantage of compound interest, every investor should take advantage of dividend reinvestment plans.

I buy shares of companies directly from them using websites like Computershare. It’s a great resource to get into purchasing DRIPs, and the company acts as the central agent for most of the companies on the S&P 500.

Do you invest in DRIPs? What’s your favorite companies to invest in using dividend reinvestment plans?

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 589 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 3 comments… read them below or add one }

Blake @ The Dividend Pig

Hi Hank!

I’m a huge fan of DRIP programs, especially in retirement accounts.

Have you given loyal3 a try yet? Also a great way to start off with small position dividend investing as the trades are commission free.

Great article!

Reply

Michael

I’m also a huge fan of DRIPs! There’s actually very little not to like about them, just as you allude to in this article, they allow for automatic reinvestment without paying any commission, can sometimes get a discount from the company for the reinvested portion, and allows for compounding of your investment.

To make investment in DRIPs even better is to set aside a set amount to add to that stock on a regular basis since this will further accelerate the growth of that portion of your investment portfolio, of course based on your risk profile and your overall determined asset allocation 🙂

Reply

Jeff F. Foster

DRIPs biggest advantage is often the discount and savings on commissions as mentioned above. Sadly, in my area, we are not seeing many people take advantage of these opportunities. To each their own. I am all over this like a white on rice on a paper plate in a snow storm.

Reply

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