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What is a DRIP?


It's a common misperception that investing in the stock market is restricted to the "big players" -- that only the wealthiest of people can afford to hire expensive brokers to manage a portfolio of common stocks.

In fact, individuals with as little as $10 to spare can buy shares of stock in companies like IBM, Sears Roebuck, Rubbermaid, Coca-Cola, AT&T, McDonald's or Xerox. Over time, an individual investing on a regular basis can build a sizeable portfolio -- and never once pay a commission to a stockbroker.

How? By participating in a company's DRIP.

So, what's a DRIP?

A DRIP is one of the greatest secrets ever revealed to the small investor. A DRIP can be one of the best tools to help the individual investor's find financial success. A DRIP doesn't require a large sum of money to be invested, so almost anyone can participate.

So what's a DRIP? It stands for Dividend Reinvestment Plan, a program run by a publicly-traded company for its shareholders. Instead of sending dividend checks to shareholders enrolled in a company's DRIP, the company reinvests those dividends by purchasing additional shares (or fractional shares) in the shareholder's name. A shareholder usually needs only one share to enroll in a company's DRIP plan, and most of the time the company will reinvest a shareholder's dividends without a fee or commission.

Some companies have DRIPs that are enormously popular with their shareholders. RPM, Inc., a Fortune 500 specialty chemical company, reports that 71% of its shareholders are enrolled in its DRIP. Over 64% of the shareholders of AFLAC, Inc., a company that sells supplemental life insurance policies, are enrolled in that company's DRIP. Over 1,200 companies have dividend reinvestment plans for their shareholders.

Companies like DRIPs for several reasons. DRIPs provide a stable base of shareholders who are likely to have a long-term, "buy and hold" investment philosophy. Individuals, particularly those who are dollar cost averaging into their DRIPs, may see the drop in a stock's share price as a buying opportunity, as opposed to institutions and traders who move in and out of stocks with short-term goals in mind. This base of individual shareholders can help stabilize a company's share price. DRIPs keep capital inside the company, by not paying cash dividends outright and having those dividends reinvested in additional share purchases. DRIPs can also help companies to raise additional capital without making a public offering.

Here's the best part about DRIPs: most allow additional purchases to be made by participants without paying a fee or commission!

That means that an investor can purchase additional shares of stock through a DRIP with as little as $10 or $25. Most companies allow these Optional Cash Purchases (OCPs) on a regular schedule, usually once or twice a month, or sometimes quarterly. The company purchases the shares and issues statements that detail the shareholder's account.