Using Dividend Reinvestment Plans (DRIPS) to Grow Your Portfolio
John Bogle is famous for saying that over the past 81 years, reinvested dividend income accounted for approximately 95% of the compound long-term returns earned by the companies in the S&P 500. Dividends have had a huge impact on portfolio returns. There is an easy way for individual investors to include reinvested dividends into their portfolio.
Dividend Reinvestment Plans, or DRIPs as they are often referred to, are investment plans that allow investors to take the dividends received from holding stock in a company, and reinvesting those dividends back into more stock.
Let’s review in more details what a DRIP is and how you can make use of them in your portfolio.
What is a DRIP?
A DRIP is an investment program that is offered by companies who wish to provide their investors with a mechanism that allows them to reinvest their cash dividends into more shares of the company. The bonus is that for most DRIPs (but not all), an investor can hold fractional shares in their DRIP account.
Most brokerages only allow investors to hold whole shares of a stock. In other words, you can only hold in increments of one. Classic DRIPs provide the benefit of allowing investors to hold fractional shares. Which means you can hold 10.125 shares in the company instead of just 10.
The main issue with DRIPs that offer fractional shares, and the reason that not everyone uses them, is that they cannot be purchased through a broker and there are some additional hoops an investor needs to jump through to set up the DRIP.
For example, to set up a classic DRIP the investor must obtain a share certificate registered in their own name. This is not particularly difficult to do, but does take more time and effort than simply signing into an online broker and buying the stock.
Types of DRIPs
There are two common types of DRIPs. The first is a Classic DRIP and the second is a synthetic DRIP. Let’s review what each type of DRIP is.
A Classic DRIP is set up directly with the company, through an agent like ComputerShare, and allows investors to hold fractional shares. In order to set this up you need to obtain a share certificate first and then go through the DRIP process for that company.
To determine if a stock you are interest in has a DRIP, simply head over the company’s website and navigate to the Investor Relations section and search for their DRIP program.
A Synthetic DRIP is provided by discount brokers as a way to reinvest dividends, but only in whole shares as opposed to fractional shares. You get the benefit of reinvesting dividends into more shares, but only if the dividend is enough to cover the cost of an additional share. If not, the dividends simply continue to accumulate as cash in your account.
To see which companies are available for a Synthetic DRIP at your broker, have a look at their website or give them a call. They will more than likely have a way to see which stocks are eligible.
Where to Find a List of Stocks Eligible for a Classic DRIP
The most inclusive list of stocks eligible for a dividend reinvestment plan that allows fractional share is available at the ComputerShare website. There are hundreds of companies that offer DRIPs to investors, and the site will guide you on how to enroll.
In addition, a convenient way to see if a company offers a DRIP is to go to the investors section of the company’s website and search for dividend reinvestment. If it is offer, the site will tell you exactly how to do it.
Three Great Stocks for Dividend Reinvestment Plans
There are literally hundreds of stocks that are available as a DRIP. Keep in mind that you should not buy a stock just because it offers a DRIP program. You should only invest in companies that you understand and have solid long term prospects.
Three examples of stocks that might be worth considering today, and have solid Classic DRIP programs are:
- Coca-Cola – The world’s largest beverage company
- The Walt Disney Company – Media company, theme parks, and now Star Wars owner
- ExxonMobil – World’s largest integrated oil and gas company
Now that you know what a DRIP is, the two kids of DRIPs available, and where to look to see if a DRIP is available, go ahead and determine which company you want to own for a long time and see you account grow as your dividends go right back into buying more and more shares over the years.
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