Dividend Reinvestment Plans
What is a Dividend Reinvestment Plan? Most companies that pay dividends offer plans that allow you to purchase as little as 1 share initially to join there DRIP programs. Once you are enrolled you can purchase shares in the company directly and avoid larger commissions for smaller incremental transactions.
In a Dividend Reinvestment Plans the quarterly dividends are re-invested to purchase more shares in the company, including fractional shares. Shares in the company are purchased on a set monthly date. You can send as little as $10 a month and there is usually a max value set by the company you are investing in. There is no obligation ever to send money once you start, you do this at your own pace and discretion.
Dividend Reinvestment Plans are a great way to get started in investing. Investing in DRIPs should be for long term investing, this provides the greatest benefit for long term investing because of the reinvesting or compounding of you investing dollars. One on the benefits of these plans is you can dollar cost average, if you send money on a regular basis. This frees you of trying to time the market. More shares are purchased when the stock is down, less when the stock is up.
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I have talked about contributing to a Dividend Reinvestment Plan, but what about distributions? Yes, the same form you use to submit purchases can be used to sell shares on the company defined set monthly date.
Here is an example lets say you want to invest in MicroSoft (sorry Apple doesn’t offer a DRIP yet), the share price is $43.00 but you don’t have much to invest. So you purchase one share of stock on the open market, some companies will allow you to purchase the initial share directly from the plan. Once you have the initial required share(s) you can enroll in the companies program and start investing. If you can only invest a small amount lets say $25 a month you will purchase fractional shares of your Microsoft stock. You will receive monthly statement showing your invested balance and shares. If you stop investing you will receive a quarterly statement showing you reinvested dividends and you account balance.
Each company has different threshold for investing. For more about companies that offer Dividend Reinvestment Plans click here.
Or go directly to ComputerShare and start investing.
For a list of the best DRIP plans