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Once you own shares of stock in a company, you have two choices. You can have the monthly dividends sent directly to you or you can choose to reinvest them to purchase additional stock. The latter option is known as a Dividend Reinvestment Plan, or DRIP. Many companies that offer DSPPs also offer DRIPs. However, if you do not want to purchase stock through a DSPP, you can purchase one share of stock in a company with a company such as Frame a Stock. Enrolling in a DRIP is usually simple and involves few or no commission fees. Once you are enrolled, the process is entirely automated, so you don't have to worry about monitoring it. DRIPs also allow you to purchase fractional shares, which is purchasing less than one full share at a time. Over time, purchasing fractional shares is lucrative because instead of holding on to cash while it builds up, it is invested right away. DRIPs also enjoy the benefits of dollar cost averaging. Over time, the investor pays an average cost for shares of the stock. The drawbacks of DRIPs are similar to those of DSPPs. Depending on the company with which you are investing, the fees can become expensive. Also, investors must think about ways to diversify their portfolio, which is difficult with DRIPs. Although dollar cost averaging and purchasing fractional shares are beneficial to investors, DRIPs do not allow the investor any control over the purchase date of the shares. Finally, record-keeping for tax purposes can be cumbersome. Choose between the partial or full enrollment plans. With a partial enrollment plan, a portion of the dividends are paid to you. The rest is reinvested back into the company. With the full enrollment plan, the entire monthly dividend is used to purchase additional shares. If the monthly dividends are not sufficient to purchase shares in the company, they are allowed to accrue until additional shares can be purchased.
Understand the meaning of a DRIP. Understand the benefits. Understand the downside. Choose a dividend reinvestment option.