First of all, what is DRIP? According to Wikipedia, a DRIP (dividend reinvestment program or dividend reinvestment plan) is
an equity investment option offered directly from the underlying company. The investor does not receive quarterly dividends directly as cash. Instead the investor’s dividends are directly reinvested in the underlying equity. This allows the investment return from dividends to be immediately invested for the purpose of price appreciation (and compounding), without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs are free of charge for participants, while others do charge fees and/or proportional commissions.
I didn’t start to use DRIP since late last year and have bought three stocks through DRIP programs so far: Bank of America (BAC) and Progress Energy (PGN) from ComputerShares and Procter & Gamble (PG) from the company. There are two reasons that I want to buy DRIP stocks: commission and dividend.
With online discount brokers getting popular and many offering free dividend reinvestment, DRIPs seem to become less appealing nowadays. However, for most brokerage firms, investors will have to pay a certain amount of commissions when trading stocks (Zecco is an exception, but I am not confident enough to use them yet). With some company sponsored DRIP programs, you can buy shares with zero commission (you may have to pay an one-time account setup fees and per share based commission when selling your holdings). And this is main reason for me to use DRIPs to purchase the three stocks: I can buy them with no (BAC and PGN) or less (PG) commissions that I would otherwise pay for other brokerage firms.
Another reason for buying these individual stocks is they all have nice dividend payout. Usually, companies offering DRIP are considered as well-established companies (value companies) that have steady but moderate growth over years (you won’t find many high-fly tech companies use DRIP to attract investors). For the three stocks I own:
BAC: Dividend yield: 4.40%, annual payout: $2.12 (2006), quarterly dividend growth: $0.10/share in 1993, $0.56/share in 2007 (BAC dividend history).
PGN: Dividend yield: 4.80%, annual payout: $2.42 (2006), quarterly dividend growth: $0.425/share in 1993, $0.61/share in 2007 (Progress Energy has increased the dividend 19 straight years).
PG: Dividend yield: 1.90%, annual payout: $1.24 (2006), quarterly dividend growth: $0.03/share in 1981, $0.31/share in 2007 (PG has increased its annual dividend for 47 consecutive years).
With DRIPs, I buy a small amount ($50 or $100, depending on the minimum requirement) of the stocks every month so I don’t have to worry about price fluctuations and I am making a long-term commitment to the company. Of course, it always feels that investing in individual stock is riskier than, for example, buying a basket of them in the form of a mutual fund. But do you trust more a mutual fund’s manager than a company’s board? Unless you are strictly investing in index funds, you are not a lot safer with an actively managed fund.
Now what’s the downside of DRIP? The biggest problem may be that you have to track the cost basis of your investment yourself for tax filing. But with an Excel spreadsheet, this is not a very bid deal as long as you remember to record the distributions every time. Another one is, instead of a flat fee when selling stocks, DRIP usually charges a fix fee plus per share based commission. This means you will pay more when you sell your shares than what you will pay for a discount broker.
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