The Reluctant Investor
The Good Leak - DRIPS

The Reluctant Investor courtesy of

DRIP, DRIP, DRIP…

No, this isn't electronic water torture - it's an investment program that favors the long term investor.

Dividend Reinvestment Programs (DRIPs) often go hand-in-hand with Direct Investment Programs (DIPs), but are entirely different beasts. While nearly 500 companies offer DIPs, over 1,200 publicly traded companies offer DRIPs. What's with all the tortuous coffee making?

How it works

Many large growth companies that traditionally pay regular dividends, such as Coca Cola and GM, offer DRIPs. As the dividends drip in (dazzling wit, eh?), these companies allow you to directly purchase more stock with your dividends.

If you own 60 shares of a $60 stock and you receive a $1 dividend from that company, you're in the money to the tune of one whole share. If you receive another $1 dividend two quarters down the road, for example, there's another whole share plus $1 for your money market account.

If you're using a DIP, the company will allow you to buy partial shares; if you receive $61 and the stock is valued at $60, for example. Most brokerages will not allow you to buy partial shares, and will sweep the extra money into a money market account, or other CMA of your choice.

Who likes DRIPs

• Investors like DRIPs for several reasons: 1) They are easy to manage (doing nothing is about as laissez faire as you're going to get). 2) DRIPs are cheap; you typically don't pay fees or expenses when you reinvest.
  
  
• Companies also like DRIPs: 1) Companies pay dividends to reward shareholders when the company is running in the black. Some profits are kept internally to fuel improvements and innovations. Reinvested dividends translate into more money for these purposes and reduces the amount of cash lost to the open market. 2) DRIPs imply investor continuity, a harbinger of steady growth (shares changing hands frequently leads to fluctuating stock prices).
  
  
• Brokerages kind of like DRIPs: Brokerages swear up and down that they love the long-term investor, since buy and hold is generally construed as the safest, most productive investing method. However, some brokerages have account minimum requirements or charge fees to participate. (Don't be naïve - they don't really love you until you're trading 20 times a week or have hundreds of thousands floating in their clearing house. Love is highly empirical in the broker business.) Companies that offer DIPs, though, are generally highly supportive of DRIPs

Resources:

• DRIP Central from Investorama's Douglas Gerlach is a great resource for learning about and researching DRIPs. The lists, guides, and message boards are great resources.

A combination of DIP and DRIP investing allows investors to invest with relatively small amounts of capital and at a reduced cost of transaction.

DRIPs are a good way to leverage your holdings in a particular stock. That's not to say that it isn't a good idea to go out and buy yourself dinner with your dividends (after paying taxes on them when you realize the gain). One thing to watch out for; if a particular company pays regular high dividends and you reinvest them, this new number of shares might require you to re-balance your portfolio (you should hope for such misfortune).

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