Choosing the Best Dividend Reinvestment Plan
Dividend reinvestment plans (DRIPs) offer several great advantages. First, by buying directly from the company you can save on commissions that might be otherwise charged. Second, by reinvesting the dividends, you can build up your investment in a company over time without large one-time purchases.
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Instructions
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Determine your maximum starting investment amount. Some plans have minimum investments and thus you should eliminate any plan with a minimum opening investment greater than your maximum starting investment.
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Research companies to determine stocks that match your risk tolerance. Remember, although the purpose of DRIPs is to reinvest the dividends over time, the stock underlying the plan still fluctuates with the market. Do not select stocks which are more volatile and aggressive than you are willing to hold.
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Use a stock screening tool to generate a list of candidates. Screen for stocks that have paid a dividend for at least five years in a row, and that the dividend has increased or at least been stable over the past five years To be a good candidate for a dividend reinvestment program, a stock must pay a consistent dividend.
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Know that the higher the ratio of the dividend to the stock price, the higher the rate of return for the dividend reinvestment program. Use a stock screening tool to return stocks that have a dividend yield of at least five percent. Choose the highest yielding stock that meets your volatility criteria.
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Research available dividend reinvestment plans to make sure that the stock you have chosen has a DRIP. If not, move to your second choice. The three major transfer agents handling DRIPs are American Stock Transfer & Trust Co, Computershare and Bank of New York/Mellon. All three companies are linked in Resources below.
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Tips & Warnings
Monitor your DRIPs every year to make sure that dividends have not been lowered.
DRIPs do not guarantee profits or stability. Always monitor your portfolio closely including all dividend reinvestment plans.
