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If you’re like many investors who spend those small dividend checks from your stock portfolio, a Dividend Reinvestment Plan (DRP) might be just what you need. Just as its name implies, this plan allows you to reinvest some or all of those dividends into more stock of the issuing company. Unlike purchases made through traditional means, partial or fractional shares, as well as whole shares, are available.
Technically, there are two types of DRPs. The first type involves buying shares at the market through an outside trustee. Although the company may subsidize the transaction costs, buying shares at a discount is not allowed. The second type allows you to purchase directly from the issuing company, which may provide a discount from the market price. This is a distinct advantage over buying from an outside trustee.
Benefits with DRPs:
Besides giving dividends a better purpose than sitting in your pocket or in a brokerage cash account, a DRP may offer other advantages as well. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in the price. Of course you should consider your ability to continue purchasing through periods of low price levels. This type of plan does not ensure a profit or protect against loss. Secondly, many companies offer added options with their DRPs, including purchasing stock at low minimums and sometimes even offering shares at a discount off current market prices.
Keeping good records is a necessity, especially if you plan to continue participating in a DRP over a number of years. Without the records, it may become very difficult to track all your purchases. A little bit of effort now can save you big headaches later on.
How to look out for DRP:
Usually, you will receive a quarterly statement outlining your DRP account. Among other things, these quarterly statements will detail your on-going investments, how many shares are held by the program, how many shares are held be you, and the value of all your shares.
Not all companies offer DRP’s but, for a list of one’s that do, there are many web sites dedicated to these plans. These internet sites not only have a full list of companies with DRPs, they also offer online enrollment services. For securities held in a brokerage account, check with your brokerage firm to determine if they have the means to enroll you. If all else fails, try either the company itself or its transfer agent.
Over 1,000 companies currently offer some type of Dividend Reinvestment Plan and, with a little research; you should be able to get on the path of investing for the future.
If the investor reinvests funds through Dividend reinvestment plan, he would enjoy any appreciation value of the stocks during the time he owns the shares. However, if the stock value declines, his dividend earnings also decline as well. Investing in DRIPs carries the disadvantage of keeping track of cost basis for small stock purchases and maintain records in digital or paper form to accurately calculate the capital gains tax in case of selling shares.