DRIPs and DSPs let investors buy shares directly from the company of her choice. Your investment grows as dividends paid to shareholders are reinvested, so your number of shares grows. And you can keep investing, sometimes on a monthly basis. There are about 1,200 publicly traded companies that offer DRIPs.
With a DRIP you can:
- Start investing by buying just one share of a publicly traded company, such as Coke or McDonald's Corporation
- Invest additional cash in these programs, called an optional cash purchase
- Invest without fees, such as commissions or brokers' fees
DSP's allow you to join a DRIP easily, buying your first share from the company immediately, without the extra step of going to the broker before enrolling, as in the DRIP plan.
The Broker-less Investor
You won't be able to avoid the broker altogether, at least in the beginning. That's because in order to qualify for a company's DRIP, you already need to own at least one share of that company's stock. To do that, you must visit a full service or a discount brokerage to buy your first share(s). Another option is one of several Websites that will sell you a single share. We have a couple listed at the end of this article.
Remember: It's essential to have the stock registered in your name, otherwise the company doesn't know you're a shareholder, and you can't take advantage of the DRIP program's benefits.
This is a key consideration, says Chuck Carlson, editor of DRIP Investor Newsletter, www.dripinvestor.com. "'It's very important that you make sure that the stock you buy in order to become eligible for a plan is registered in your own name," he says. "It cannot be registered in what's called the 'street name' or the name of the broker, " he says.
Carlson also warns that brokers may charge you an additional fee to buy one single share. "It's going to feel like a rip-off, but just consider that fee your ticket into the plan. It's the cost of doing business, and remember, your ongoing fees are smaller, " says Carlson.
How to Start Investing with
DRIPs and DSPs
- First, find which companies offer the programs. Companies often post the information on their Websites or you can contact a company's investor relations office. You can also consult one of the many online resources that deal with DRIPs.
- Pick a company you believe has good long-term prospects. "These are programs that are geared primarily for long-term investing, so you want companies that have good long-term consistent track records of growth. You want to look at how well the companies' profits increased over the last five to ten years, its sales and dividends," Carlson says.
Here are a few more tips:
- Read the fine print. Request a plan brochure, the "prospectus" for the stock, and read it carefully. Unlike, say, mutual fund investing, there can be big differences among plans. "Investors need to understand that not all plans are the same," says Carlson. "Some charge fees and have different minimum and maximum investment amounts to open accounts."
- Choose the frequency of your investment. Some DRIPs buy stock weekly or monthly. Make sure the company buys stock at regular intervals and if the company charges a fee, you want less frequent investments.
- Look for added perks. If you're interested in a plan with a variety of services, for example, an IRA option or automatic debit from your bank account, the plan brochure will tell you what's available.
- Set a Goal. Finally, decide what place DRIPs occupy in your investment strategy. "If this is going to be the biggest chunk of your investing, you do need to have diversification, which means you're going to need about 13 to 17 stocks in a portfolio," says Carlson.
Things to remember when considering DRIPs and DSPs:
- Always buy the shares in your name, especially if using a broker to buy the first share(s).
- Watch out for brokers who may try to enroll you in their own plans, which they may label as "DRIPs." These are not the same as company sponsored plans, and they may have added fees. If you want to enroll in a company's plan, you can only do so through the company.
- Keep good records of all your plans, especially yearly statements.
Resources and Information
At NetStock Direct, free membership gives you access to information on 1,600 companies offering direct stock purchase programs and open an account.
Drip Central is an excellent resource for DRIP information.
If you'd like a third party to handle the enrollment for you, firstshare.com and moneypaper.com offer another way to enroll in DRIPs. Though they may take longer and the setup process does tend to cost more, they are legitimate ways to start investing through DRIPs.