Why I Love DRIPs

What if you're a small investor, but you want to play with the big boy stockpickers? Shouldn't you just stick with index funds and leave the stock picking to the pros? Not necessarily. I indulge my own stock picking desires by investing in individual stocks through Direct Purchase Plans and Dividend Reinvestment Plans.

Be aware, these plans are not a substitute for a well-crafted investment plan, nor are they meant for active traders. But if you are a buy and hold investor with small sums to invest, these plans can be a good way to build a substantial portfolio over time, a few dollars at a time.

Some DRIPs require you to already own one or more shares of the company in your own name before you can join their plan. Although the advent of online trading has significantly lowered trading costs, the fees for registering, in your own name, shares bought through a brokerage can range from minimal to steep. I prefer companies that have Direct Purchase Plans. These companies allow you to purchase shares and partial shares directly from the company without first having to purchase and register shares in your own name through a broker.

Every company that has a DPP has its own rules and regulations governing the purchase and redemption of shares, but you will find that most companies' rules are quite similar. Usually, the only differences between plans are the fees charged and the minimum number of dollars necessary to open an account. My preference is for companies that have no account maintenance fees, no or very low initiation fees, and no or low purchase fees. I don't worry about redemption fees too much, as long as they're not too steep. I plan to hold my shares for a long, long time. As I said, these plans are best suited for buy and hold investors. Make sure you really want to own a piece of these companies before you write the check for that purchase.

I also prefer companies that keep the account minimums necessary to open an account low. Many companies allow you to open an account for $250.00 or less. Most, but not all, companies also let you make additional optional purchases after the initial purchase, some for as little as $25.00. I make sure that the companies I choose allow me to make optional cash investments and that the minimum for such an investment is $100.00 or less.

Some companies, if not most, also allow you to set up an automatic investment plan. Each month or each quarter, an amount of money that you designate is transferred from your bank account to your DRIP account and used to purchase additional shares in the company.

Now, with these DRIPs you can have the dividends sent to you by check or electronic transfer, but if you're just starting out, you will defeat one of the best aspects of these plans: the compounding effect of reinvested dividends. Plunk down a couple hundred bucks for a few shares in a prosperous company with prospects and sign up for the automatic dividend reinvestment feature. A couple or four times a year, dividends are paid on the shares you own. Essentially, the house's money buys more shares for your account. The next year the original shares and the shares bought with the previous year's dividends all earn dividends, which buy more shares, which produce more dividends, which.......And this goes on until a couple of decades down the road, when you're ready to retire, you've got a healthy chunk of company shares that cost you next to nothing and each share produces dividends. Then, and only then, do you sit back and collect the, hopefully, much larger dividend checks. And that, you gotta love.