Dividend reinvestment plans(DRIPs) allow automatic investment of stock or mutual fund dividends for the purpose of gaining more shares, sometimes at a 5% discount and, in many cases, without added fees.
DRIPs are a form of dollar cost averaging—a strategy of depositing equal amounts of money into a stock or mutual fund at regular intervals, thereby purchasing more shares when prices are down and fewer when they are up. Dollar cost averaging doesn’t guarantee you a profit or remove the risk of loss, but with this technique an investor can often substantially increase holdings over time.
Remember, investment return and principal value of funds will fluctuate due to market conditions. When shares are redeemed, they may be worth more or less than their original cost.
When investigating DRIPs, also keep in mind that plans differ in several important respects. Consider the following:
- What is the performance history of the issuing company? You should examine the earnings history in the prospectus.
- What is the minimum number of shares that must be purchased? Some plans require that investors buy a specific number of shares before they may participate.
- Are there reinvestment fees? Many companies do not impose fees, while others may charge up to $10 per transaction.
- Can additional shares be purchased for cash? Some plans allow investors to take further advantage of dollar cost averaging by investing an additional $10 or more per month.
DRIPs offer a sound opportunity for long-term automatic investing, in some cases, at reduced levels of expenses. Talk with your financial professional to determine if DRIPs make sense for you.