First time investors often don’t have the capital necessary to properly diversify their portfolio. While buying stocks from higher valued companies has definite advantages in terms of stability, the necessary initial investment cost can be prohibitive.
What is DRIP Investing?
DRIP investing— short for Dividend Reinvestment Plan or Dividend Reinvestment Program— can solve this problem. Individual companies allocate a certain percentage of their stocks to be purchased by individual investors without a broker acting as middleman. Since there is no portfolio administrator and no broker fielding buy/sell requests, most companies that participate in DRIP investment don’t charge fees for buying and selling. Companies participate in DRIP investment as a way of providing financial stability for their enterprise. Any dividends are automatically reinvested in company stock. The customer benefits from owning quality stocks without paying the fees normally associated with investment.
The Benefits
For an investor that wants to make a long term, low cost investment in a specific company, DRIP investments offer several advantages. First and foremost, many companies offer stocks at a reduced price if the investor agrees to buy the stock directly from the company. This factored with the reduced/eliminated brokerage fees makes DRIP investment an attractive option.
Another advantage of DRIP investment is the potential for automated purchasing. Many companies will allow an investor to schedule stock purchases throughout the year. This spreads the financial burden across a greater expanse of time, and facilitates last-minute changes in investment strategy.
Possible Pitfalls
Before considering DRIP investment, a novice investor should take several factors into account. Unlike online or personal brokerage services that automatically track all investment transactions in one easily monitored location, DRIP investment requires the investor to keep track of each investment on their own. When tax season arrives, they must calculate earned dividends by comparing the original purchase price with the current stock value. Further, investors that haven’t fully developed an investment strategy might benefit from the professional advice offered by a financial consultant.
For an investor who wants to make every dollar count, DRIP investment might be a winning strategy.
Bio: Alexis Bonari is a freelance writer and blog junkie. She is currently a resident blogger at First in Education and performs research surrounding online degrees. In her spare time, she enjoys square-foot gardening, swimming, and avoiding her laptop.
