How to take Advantage of DRIP – 3 Great Things About Dividend Reinvestment Plans

After talking about creating the Ultimate Portfolio and thinking about dividends, I thought it would make sense to write about Dividend Reinvestment Plans (hereafter DRIP). DRIPs are where companies with stocks allow you reinvestment your dividends back into the shares of the company. There could be fees involved and sometime the company that you are buying dividends for allows you to buy more shares at a discount. One thing you should keep in mind is that even though you are not receiving the dividends in cash, you are still required to pay taxes on the dividends.

Feature #1
The best thing about DRIP is that you can buy more shares of a stock without incurring brokerage fees for the purchase. You can save a significant amount of money if you plan on buying more shares of a company since every purchase can cost you anywhere up to and over $100 if you buy through a full service brokerage firm also depending on the amount of shares that you buy. Obviously, you can buy shares of a company for much cheaper through online discount brokerage firms and you can often make purchases for less than $10 per trade.

Feature #2
Another great feature of DRIP is that you may be able to buy the shares of a company that you like at a discount. Some companies give discounts of 5% off of their market share price so that investors will buy more of their stocks. So basically you are saving the commission fee of buying the stock and you also get to buy the stock at a discount, that’s not too bad!

Feature #3
Yet another great feature of DRIP is that you can dollar-cost-average you cost base of the stock. Over time when the stock pays its dividend, you will be able to add to your stock base with the increase of shares from DRIP. This only makes the deal sweater, be sure you read my article about Dollar-Cost-Averaging to get a better idea of what this entails.

Things to Consider When Investing in DRIP
Because you get more shares every time the company pays a dividend, you have to remember that your cost base changes. When this happens you have to keep track of the change because if you sell the shares that you own, you will have to use that new cost base for the purpose of your taxes. Also, remember that you can always opt out of DRIP if you eventually decide that you want cash. Every company may have different rules regarding opting out but it really should not be that complicated as long as you give it some time for the switchover.

Mo2 Thinks
DRIP is a great way to increase the value of your portfolio especially if you don’t need the dividends right away. Many of you might say that you actually do need the dividends, but in reality, most of you don’t. Money that you don’t see, you probably won’t need and by locking away the funds into DRIP it will only help you in the long run by keeping the money safely out of your hands. Until you really need to start taking money out of your portfolio to supplement or replace your current employment income, it’s probably best for you to help your portfolio grow on its own by utilizing DRIP. Remember, your end goal is financial freedom, and it does no good by taking money out of your portfolio on a regular basis. Even if you are getting cash dividends I would suggest that you reinvest in one form or another, even if it isn’t the same stock.

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