About Drip Investments

If you've read about a DRIP investment and thought it had to do with coffee makers, you'd have been wrong. A DRIP investment is an acronym for a direct reinvestment program. In this program, companies allow you to reinvest your dividends to purchase more stock free or at a nominal cost. DRIP programs have been around for a long time, but are now gaining in popularity.

Types

Start a direct reinvestment program with the transfer agent for the company. If you find a company where you'd like to invest, you have the option of going directly to the transfer agent if they offer a DRIP investment program. Go to the company's website and look under "investor information." They aren't allowed to advertise the program on their own website, so you will be taken to a page that shows who the transfer agent is. Check the company on the transfer agent's site and see if there's a program, or use the list from the reference area.

Types

Use a brokerage house that specializes in the purchase of fractional shares of stock. ING offers ShareBuilder, a program that allows you to purchase any number of companies' shares or fraction of shares at a minimal cost. They also do DRIP investments (see Resources below). If you already own the stock and hold it in a brokerage account, many brokerage houses offer the opportunity to enter a DRIP to their clients on specific stocks.

Considerations

Remember that you first must own a share before you receive dividends to reinvest. Find companies that offer Direct Purchase Plans. Often you can buy as little as one share. Some companies raise the bar and require more, so check their requirements before you sign up for the plan (see Resources below).

Benefits

Benefit from the ability to buy shares with dividends below the market price. A few companies offer this feature. While the spread is small--only a few percentage points--it still is some money in your pocket. Remember that each share that you buy gives more dividends later.

Considerations

Save back some money for the taxes on the dividends. Even though you didn't receive the money, the IRS considers that you had constructive receipt. This means that you benefited from the money via the purchase of more shares. You have to pay taxes on them. This money adds to the basis you have in the stock. The basis is the money that you subtract when you sell the stock to find out your profit.

Effects

Build your portfolio one fraction of a share at a time. If you are young, this is one way to save for retirement. While the dividends seem small on one share, as you buy more through the DRIP investments, the amount of dividends grow and so does your number of shares. When your stock price drops, the dividends buy additional shares because of the lower price.

Features

Save some dividends for now and use the rest to purchase shares. If you're using the money from dividends, many of the companies offer the option to take some of the money in cash and use some for DRIPS. This allows you to continuously increase the number of shares and hopefully the amount of money from dividends.

Resources

• List of DRIPS from Wall-Street.com.
• ING's ShareBuilder