My brother had successful careers in teaching and social work, both of which provided a retirement pension. He supplemented his retirement savings by starting a dividend reinvestment plan (DRIP) about the same time he started a family. His reasons for DRIP investing are that he hates paying brokerage fees, loves picking stocks, and relies on dollar-cost-averaging to smooth market fluctuations. It’s the classic strategy of investing disposable income on a regular basis.
The DRIP allows for making small investments, typically $20-$100, in a few shares of stock. The investor buys an initial one or more shares through a low-cost broker with the provision that the shares be registered in the investor’s name, not the name of the broker. The investor can then open a DRIP account and buy additional shares directly from the company. The company automatically reinvests the dividends (1-3). The big advantages of a DRIP account are dollar-cost-averaging and compounding returns. The disadvantages of a DRIP are meticulous record keeping for tax purposes (1,3) and potential hidden costs of reinvestment (read the prospectus!) (1). Not all DRIPs are available in tax-deferred accounts (3).
Direct stock purchase plans (DSPPs) allow for direct purchases of stocks from a company or the company’s transfer agent. There may be restrictions on the minimum deposit, typically $100-$500, and when purchases can be made. The big advantage is avoidance of brokerage fees (2,4).
References
- Kaye A Thomas. Dividend reinvestment plans. Fairmark Press Inc. Copyright Kaye A. Thomas 1997-2013. http://fairmark.com/capgain/basis/drip.htm
- David and Tom Gardner. Fool’s school: small DRIPs, big profits. The Motley Fool. The Columbus Dispatch, 2/24/2013.
- Lewis Schiff. The Millionaire’s Companion. Armchair millionaire books, www.armchairmillionaire.com.
- Investopedia. Direct Stock Purchase Plan- DSPP. © 2013, Investopedia US, A Division of ValueClick, Inc. http://www.investopedia.com/terms/d/directstockpurchaseplan.asp#axzz2LvsePTf7
