DRIP, DRIP, DRIP – Safe Profits
Dividend Reinvestment Plans (DRIPs) can be an effective strategy to avoid any panic selling in a bearish market. DRIPs provide an investor with the option of receiving additional shares of a company and not dividends. Once an investor enrolls in this plan, any cash dividends paid by a company are used towards the purchase of more shares of the same stock or company.
This strategy is more useful for those investors who can live without dividends for a long time, preferring to forgo any dividend payments for acquiring more shares. Indeed, DRIPs are best suited for the long-term investor.
With DRIPs, the investor benefits from a compounding effect. While investors obtain more shares, they are simultaneously increasing the value of their holdings and portfolios.
The Logic behind DRIPs
The rationale behind DRIPs is that investors will eventually weather out short, but violent, movements in the value of stocks. Not focusing on short market movements, DRIP investors look towards the long-term horizon for eventual capital growth.
Under this plan, it is not easy to sell shares. Although there are no restrictions on selling your DRIPs, the process can be complicated, time-consuming, and costly. Though these can be considered drawbacks, it ensures that the investor does not fall victim to panicked or impulse selling.
Types of DRIPs
There are two types of DRIPs. One is directly offered by the companies. The second type is directly offered in-house by brokers. The former are typically better investments and more lucrative.
One major drawback with in-house DRIPs is that they are available only in whole numbers, and therefore, you cannot buy partial shares. On the other hand, you can buy even partial shares under DRIPs offered by companies directly. For example, say you obtain a dividend of $30 and the price of a share of that company is $20. With an in-house broker, you can buy only one share, leaving a balance of $10. In comparison, with direct company DRIPs, you can qualify to buy one and a half shares – fully maximizing your capital.
Essentials of DRIPs
In order to enroll under this plan, you must first own shares of the company, which is a pre-requisite for enrollment. Therefore, there are several steps to take to own a successful portfolio of DRIPs:
1.The first step is to research which companies offer DRIPs, or whether the symbol you are particularly interested in offers this program. Remember that all the companies do not have DRIPs.
2.Buy shares for that particular company in the open market.
3.Transfer your share into your own name. You must contact the registrars of the company to request that the shares are transferred. This does involve the payment of fees.
4.Once the shares have been transferred to a particular name, you can contact the registrar and apply to be enrolled under DRIP of that company.
5.Once enrolled, whatever dividend you receive monthly or quarterly is automatically spent on the purchase of equivalent shares. There is no additional need for transfers.
DRIPs can be a lucrative, intelligent financial instrument for the long-term investor. And with these current market conditions, we may all need to focus on our long-term portfolios.