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It sounds like something related to a leaky faucet, but is an easy way to invest small amounts of money. DRIP stands for Dividend ReInvestment Plan. It means its an investment plan that allows investors to reinvest their cash dividends by purchasing addition shares or fractional shares on the dividend payment date. Dividend Reinvestment Plans (DRIPs) have been around since the early 1960s.

Basically, instead of receiving a small dividend check at the end of every fiscal quarter, the company will reinvest that money back into that same stock, and purchase more shares.

Here’s a detailed example of a DRIP in action:

Exxon Mobil (XOM) currently offers a dividend of $1.76 per share yearly (or $0.44 quarterly). If you own 100 shares of Exxon Mobil, you would receive a dividend check of $44 each quarter. Rather than accepting this small check, you may decide that you’d rather reinvest it into the Mobil stock, and utilize the DRIP method to do it. If the stock price is $88, your reinvestment will purchase one half of one stock. That’s it! Simple huh?

How Did DRIPs Start?

Many companies offer a stock purchase program for their employees (often purchased at a discount, which is a nice bonus). Rather than pay out dividends in a check, these companies offered their employees the option to reinvest that money back into the company’s stock. This became quite popular, and many companies now offer this option to all stockholders.

How Do You Start DRIP Investing?

Investors who wish to take advantage of DRIP Investing must first own at least one share of the company’s stock and own it in their own name (not their broker’s).

If you meet these two requirements (in the previous paragraph), you can set up the DRIP by simply calling the company (found either in the prospectus or on their local homepage) and ask for the DRIP enrollment information. Their DRIP accounts may be handled by a transfer agent, but I’m sure they will be happy to redirect you to the proper contact.

After you enroll, all of your account activity will be handled by that transfer agent (often times, this is First Chicago Trust or Boston EquiServe).

How to Purchase a DRIP?

  1. Brokerage – Some brokerages allow shareholders to reinvest their dividends at no cost through their plan. If you already have your shares purchased through a brokerage, perhaps you could investigate this option.
  2. Transfer Agent – Since these DRIPs have become so popular (and time consuming for the dividend-offering companies), some companies have turned to a third-party corporation to take care of the reinvestment plan. The most well-known transfer agent (in my opinion) is First Chicago Trust.
  3. Direct – Quite a few companies do still run their own DRIPs. When you call them for their enrollment information and they direct you to an in-house representative, you know that they are handling these operations by themselves.

Honestly, it really makes no difference who is handling the DRIP, and long as your dividends are being reinvested back into your investments; and after you enroll, that’s exactly what will happen.

What Companies Offer DRIPs?

Obviously, companies must be offering a dividend before they can institute a DRIP program, and many businesses are actually moving away from this offering. According to The Motley Fool, out of the millions of millions of companies, there are only a few thousand that are offering a dividend these days, and out of those, there are only about 1,100 companies that provide a DRIP investment program. In the grand scheme of things, though, a thousand options still offers you quite a wide variety to DRIP stocks to choose from. Many of the dividend aristocrats offer DRIP programs to their investors.

Here are a few companies that offer DRIPs:

  • Coca Cola (KO)
  • 3M (MMM)
  • Exxon Mobil (XOM)
  • PepsiCo Inc (PEP)

What Are the Advantages of DRIPs?

DRIPs are long term investments, and for adding at little amounts at a time.

  • Low Cost – This is often a very low-cost (sometimes free) way to reinvest in a company that you believe in. If you decided to receive the dividend check and reinvest the funds yourself, you would need to pay the transaction fee on the purchase (which might actually cost more than the reinvestment amount!).
  • Automatic Reinvestment – By setting up your automatic reinvestment, your mindset will automatically think in terms of long-term investing, which is the ideal model for a handsome retirement savings in the future.
  • Increasing Dividend – By purchasing more stock with the dividends, you will increase your dividend payout in the next quarter. This will be an exponential growth as you continue to reinvest your dividends!

If you invest in a DRIP, can you tell us which company? What features do you like or dislike with the specific DRIP?

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Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.