So, what is a DRIP?

Let’s discuss, and get you started :).

Dividend Reinvestment Plans are investment accounts that are opened with a Company’s Share Transfer Agent, similar to Computershare or Shareowner Online. These plans are also called Direct Stock Purchase Plans (DSPP) or accounts because in essence you’re buying stock directly from the Company, rather than a broker.

The Company here means the company in which you want to invest, like Pepsico, Walmart, AT&T, Abbott Labs, Johnson & Johnson etc.

DRIP accounts have many advantages:

• Enables small investments:  you can buy shares with as low an investment as $25 to as high as $250,000 per year or higher depending on what the Company specifies in their authorized Direct Stock Purchase Plan. That means, if the share you’re buying is priced at $100, but you are investing $25, then you’ll be sold 25/100 = 0.25 of a share of that Company. Thus, if you invest $25 per month for 6 months, you’ll end up with 0.25 * 6 = 1.5 shares of the Company at the end of 6 months. For the sake of example, I have put aside any investment fees the plan may charge, though there are zero fee plans too.
• Supports SIPs:  you can create a Systematic Investment Plan (SIP) where you specify a recurring investment amount that you want to invest on a periodic basis. When you want to change the recurring investment amount or decide to stop the recurring investment, you can do so anytime. Such SIPs help in terms of what is called Dollar / Euro / Rupee Cost Averaging, and allow you to invest the small sums of money you have for investment every month after taking care of all your necessary expenses.
• Low Purchase Costs:  the costs (not the share price that you pay) of buying shares is less than what you would pay a broker for buying shares via your brokerage account.
• Dividend Reinvestments:  the dividends that you get from your shareholding can be invested back in buying fractional shares that slowly (like planting seeds that grow into trees to give you shade and nourishment for years to come) keep compounding and building into larger investments in, and subsequently more dividends from, that Company over time. A virtuous circle, one might say. When you decide you need the dividends for income, you can stop the dividend reinvestment and have the entire dividend transferred to your bank account when its paid by the Company. You could also say you want 50% dividend to be reinvested and 50% paid out to you in your bank account, or any percentage combination between dividend reinvestment and payout.

DRIP accounts have disadvantages too, if you can call them that given that you are a long-term investor and not a trader / day-trader:

• Non Real Time Execution of Buy Orders:  the buy orders are executed in batch form, after your money is received from your bank account that is linked to the DRIP account. So, if the Company (not Computershare, remember) has marked every Wednesday as the purchase day for any orders received (and money for this order received from the linked bank account or funding source), then if you placed the order on Monday and the money is received on Thursday by Computershare, you have missed the buying window for that week, and the order is executed the next Wednesday, which would be the next purchase day. Thus, you may understand why you are not able to get the market price prevailing on the day you placed the order.
• Non Real Time Execution of Sell Orders:  the sell orders are also executed in batch or market order form. Batch orders cost less, but you don’t get the prevailing market price on the day you placed the sell order. Market orders give you the prevailing price on the day you put in the sell order, but cost a bit more than the Batch orders. As an example, Batch orders for Exxon Mobil cost $15 plus 12 cents / share sold, whereas Market orders cost $25 plus 12 cents / share sold.
• High Selling Cost:  The sell order trading cost in a brokerage account would be $6.95 and you can sell instantly at the market price or a particular price you want (limit orders). Whereas the price to sell from a DSPP / DRIP account would be high, like $15 plus 12 cents / share sold. Thus, here’s a small comparison of selling 100 shares from a brokerage account vs. selling from a DSPP / DRIP account:
  • Brokerage Account Selling Cost = $6.95 for 100 shares sold
  • DSPP / DRIP Account Selling Cost = $15 + (100 x 0.12) = $15 +$12 = $27 for 100 shares sold.
  • But, if you purchase shares using a SIP in your DSPP / DRIP account, then the recurring $6.95 per trade for buying any number of shares in your brokerage account will far exceed the one time or less frequent selling cost you may incur after years of accumulating shares and dividends in the DSPP/DRIP account. Also, you may not incur any selling cost if you plan to gift them after you’re gone.
  • To repeat, the purpose of DSPP / DRIP plans is to make investments that you probably plan to hold for long term – 5, 10, 15, 20 or more years – where your dividends are getting reinvested, and the very low costs and the magic of compounding are working for you.

Thus, for example, Computershare is the Share Transfer Agent for 100s of companies like Johnson & Johnson, Walmart, AT&T, Exxon Mobil, Abbott Labs etc. And, Shareowneronline also has 100s of companies like Wells Fargo, GE, Johnson Controls, Walgreens Boots Alliance etc.

Most new technology companies like Apple, Microsoft, Oracle, Twitter, Google, Amazon, Netflix etc. do not have Direct Stock Purchase Plans, and many of them don’t even pay dividends which means having a DRIP account is a moot point :). But, not having DSPP/DRIP plans does not mean they may not be good investments. In fact, in the long term, Apple, Google, Amazon and other companies have been good investments providing significant long term returns to shareholders in terms of mostly capital gains, and dividends by a few of these companies that pay them. To invest in such companies you would have to take the Mutual Funds and/or ETF investing routes via Brokerage or Mutual Fund investment accounts.

Next, we’ll tackle how to get you started on a DSPP/DRIP with the Company that you want to invest in for the long term.

Let’s dive in to discuss how to invest in DSPP/DRIPs.

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