Direct Reinvestment Plans

If you've ever considered investing in the stock market or have investments through a brokerage firm, you must be aware that many of your profits can be devoured by the cost of doing business with personal brokers - trading and maintenance fees. If you are confident investing your own money or would like to save money and reap higher profits, you can easily cut the middleman and invest directly with most companies listed on the major exchanges. Direct reinvestment plans (DRIPs) have been around for years, and are a good choice for long-term investors.

DRIPs weren't made for day traders, but for investors willing to buy a stock and hold it for five, ten, or twenty years. DRIPs often charge as little as a dollar or two for buying new shares, and some DRIPs charge no fees, even when making large investments (hundreds or thousands of dollars). DRIPs allow small investors to purchase shares, and fractions of shares, with as little as ten, twenty-five, or fifty dollars each month.

A drawback of many DRIPs: when you decide to sell a stock, it costs considerably more than when you bought it. A sale may cost twenty-five dollars, plus ten cents a share. These prices are often to discourage investors from buying and quickly selling their shares.

DRIPs often require you to own at least one share of a stock before you can enroll, but other DRIPs allow enrollment with a minimum investment of $250 to $500. Nearly all DRIPs require a small enrollment fee of ten or twenty dollars.

DRIPs automatically reinvest your dividends. Reinvesting Dividends over the course of thirty or forty years can add thousands of extra dollars to your portfolio. [Demand Dedicated Dividends]

You have to pay taxes on all dividends, even those you reinvest, so keep track of dividends you've received throughout the year.

You can take advantage of automatic deposits through your bank or checking account. This allows you to dollar-cost-average your investments, a strategy that takes full advantage of the market's ups and downs so you won't always buy when the market is at a peak. [Dividend Reinvestment Plan, Wikipedia]

DRIPs can take the stress out of managing your investment portfolio. Because there is no need to watch your DRIP daily you can let months pass before you look at a statement or check a stock's price. Investing in solid, proven companies allows you to sleep easy knowing you will have much more than you put in when it's time to retire.

If you're interested in investing in a specific company and would like to know if they have a direct reinvestment program, you can find out by looking at the investor relations page on the company's website.

Sources:
1. Selena Maranjian, Demand Dedicated Dividends, The Motley Fool
2. Dividend Reinvestment Plan, Wikipedia