A dividend investment program, also known as DRIP, is a program that allows investors to use their cash dividends as a reinvestment into more shares or fractional shares on the payment date of the dividend. Simply put, you are able to invest into large companies for a low price. Let’s look at a further explanation…
You can purchase shares from a choice company directly without the need of a stockbroker. Your investment of the shares then expand and grow as the dividends are reinvested into the choice company, which then enhances the amount of shares that are owned.
DRIPS are a great way for an investor to increase their investment value. Many of these programs allow investors to purchase shares at a commission free base. Sometimes, you can find shares at a lower cost than the current share price. In addition, investments can be on a regular basis and can range anywhere from as small as $10 to $500,000 at any given time. You can make the investments on a weekly basis, quarterly basis, etc. How frequently you make the investments are ultimately up to you as the investor.
Now that you know how DRIP programs work, let’s take a look at the benefits of dividend investment programs so that you know why you should invest in such a program.
DRIP programs allow you to invest into just one share of a company to begin with. The reason for this is that you must own a share within the choice company in order to qualify for the dividend investment program.
Now, all investments into DRIP programs are commission free due to the fact that a stockbroker is not required to make the trade possible. This is excellent for average or below average investors as most of the time, these investors don’t have the money to spend on the cost of a broker.
Most DRIP programs allow the optional cash purchase of supplementary shares from the company directly at a discounted rate (anywhere from about 1% to 10%) with no fine print fees.
Since dividend investment programs are so flexible, investors are able to change the amount that they invest based off of their current financial situation. That means if you can afford $100 one month, but $500 the next month, then that’s fine. As stated above, you can make investments as small as $10 as large as half a million dollars.
In addition, some DRIP programs will allow investors to purchase stock at a discounted rate from the current stock market price. The discount can range anywhere from as little as 1% to as much as 10%. If an investor outside of a dividend investment program purchased shares, the investor would be looking at a significantly higher price since the shares wouldn’t be commission free and without the discount.
Finally, DRIP programs also utilize a concept known as dollar-cost averaging. This is when the price is averaged out so that you never purchase stock when it is at its low nor when it is at its peak and it averages out over long periods. Ultimately, you’ll purchase more stocks when the price is near its low and less when its near its high; however, in the end, it averages out to be somewhere in the middle of all that.