Dividend Reinvestment Programs are an investment method offered by a surprising number of companies. The key difference between buying shares in a Dividend Reinvestment Program (or DRIP) is that instead of receiving a dividend as you might with other shares, the company will reinvest the dividends on your behalf, effectively increasing your number of shares with no action on your part. Many investors find that this helps them to avoid spending money that would otherwise have been burning a hole in their pockets! Many don’t realize that even if you participate in a DRIP, you are not forced to reinvest dividends. You can elect to receive some or all of your dividends in cash, and even if you take this option there are still benefits to DRIP investing. Often, companies will offer their shares at a discounted price for members of their program, and there is usually no equivalent to brokers fees either.
A complicated factor is the requirement to pay tax on the value of any dividend, whether they were reinvested or not. Careful record keeping is the main drawback for this type of scheme. Depending on how the company in question runs their plan, investors may also be given the option to make regular cash purchases of additional shares, often with very low or no minimum threshold. Coupled with the reinvestment of dividends, the occasional small purchase can add up to a substantial investment over time. If you are prepared to deal with the record keeping, or invest in finance software to handle this task, DRIPs can be a very effective and easy way to build a portfolio of shares. They require a little more legwork up front, but can be more friendly than dealing with a broker and with the ease of buying small amounts of a companies shares, you can test the water without worrying about brokers fees.
