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Understanding Dividend Reinvestment Plans
A dividend reinvestment plan, or DRIP, is when a company offers existing shareholders the opportunity to plough their dividends back into new stock. These are not the usual shares, as they tend to be partial purchases of the usual block of shares. The accounting for them gets ugly. One of the attractions of a DRIP is that it carries zero brokerage commissions. In essence, the company is doing an end-around the broker by selling new stock to the shareholder directly. It may even be possible to add more stock on top of the DRIP investment by adding in additional cash, also staying within the rules and avoiding the brokerage commissions. While DRIPS do reduce brokerage fees, they are not without their faults. The paperwork Many DRIPS involve a significant amount of paperwork to make the whole thing happen. Some of this is for regulatory compliance purposes. Some is for the company's own internal accounting procedures. None of it is pleasant. Depending on your tolerance for red tape, this may be reason enough to chase you away from participating in a DRIP. Not always the best company A company offering DRIP mechanisms to it's shareholders may very well be overly anxious to add to a slowing or shaky current position (cash required for operations). This is a potential red flag, waving in the investor's face to beware of the company investment in the first place. Do your homework first. Just because there aren't brokerage commissions on the DRIP purchase, doesn't mean the investment is a good one. Does the extra investment fit into your risk profile? Are you looking at adding more dollars to this company anyway? Or considering divesting? Consider all the options. The DRIP Fees While there are no brokerage commissions on a DRIP, there are still fees. Any initial stock purchase fees or transaction fees still apply. So, do the math. Any drip transaction should be weighed against all your other investment options before proceeding with it.
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