How Dividend Reinvestment Plans (DRPs) Work

One of the biggest obstacles that stand in the way of people investing in stocks is to no surprise money, but there is a way to invest in stocks and grow your portfolio over time without incurring a lot of fees using Dividend reinvestment Plans (DRPs). Many publicly traded companies will offer DRPs as a way for their specific shareholders to benefit by way of offering to let them buy directly from the company in almost any amount.

The plans get their name from the fact that any dividends that are paid on the stocks are generally reinvested and used to purchase more stock. Usually all it takes is one share to get started ad if the dividend is not enough to purchase a whole share then a partial or fractional share is then purchased.

You may be wondering why you have never heard of this type of program from your broker. Usually DRPs are the types of programs that come with little to no commissions so it really isn't in your broker's best interest to tell you about them. As a former broker I did tell my clients about them, but really it is a personal preference and sometimes a firm preference as well.

Right now there are about 200 companies that participate in DRPs. Why? The reason is simple; it makes people buy more of their stock. Because dividends are reinvested the companies know that more stock will be bought and likely will be held for the long term.

But this approach to investing is advantageous to you as well. You will enjoy the ease of investing with little money, have low to no commissions, enjoy a dollar cost averaging strategy, and you will be buying some of the biggest and best stocks that the market has to offer.

Once again it just goes to show that you do not have to be rich to start an investment plan now. By investing just a little bit of money now and a little bit as you go, a DRP you will slowly begin help you to accumulate your wealth. Just as the name implies, DRPs can have you gradually "drip" your way to a "big puddle" and a better future.

Source: Kaye A. Thomas, Dividend Reinvestment Plans, Fairmark.com