By Mike Kapsch
If you're the type of investor who likes to "set it and forget it," DRIPs can be used as a great way to steadily grow your wealth. You don't always need a broker to get in on the world's best and biggest companies. In fact, you don't always need to pay what the market does for a company's shares, either.
Thanks to dividend-reinvestment plans (DRIPs), not only can you invest directly in companies like Exxon Mobil (NYSE:XOM), 3M (NYSE:MMM), and PepsiCo. (NYSE:PEP) without upfront fees, sometimes you can buy a company's shares at a 3%, 5%, even 10% discount.
The Power of DRIPs
As the name suggests, DRIPs are only offered by companies that pay dividends. There are about 1,100 firms that offer these plans today. If you're the type of investor who likes to "set it and forget it," DRIPs can be used as a great way to steadily grow your wealth.
For example, let's say you'd like to get in on long-time dividend distributor Exxon Mobil's DRIP. To qualify, all you need to get started is to contact Exxon's transfer agent Computershare and have a minimum investment ready of $250. This initial payment can be satisfied by buying $250 worth of Exxon's shares all at once or by having $50 automatically taken out of your checking or saving account for five consecutive months.
After that, additional investment is up to you, as long as each contribution is at least $50 (with a maximum limit of $250,000 per year). And as far as charges and fees go, Exxon does have a sale fee of $15 plus $0.12 a share.
But by investing in Exxon's DRIP, you could save hundreds of dollars per year on the amount of fees you'd normally incur with your brokerage firm. Exxon charges nothing to set up a DRIP account and you can automatically reinvest your dividends and/or make additional purchases at no extra charge, as well. Plus, existing Exxon shareholders are even waived the initial $250 investment to start.
There are some other pretty cool advantages, too…
- Investing in Small Amounts: DRIPs allow you to purchase stock on a dollar basis as opposed to buying a certain number of shares. This enables investors to buy fractions of shares of a company. Some plans will even let you invest as little as $10 a month. And this could be in companies that otherwise cost $50, $80, or $100 per share.
- "Worry-Free" Approach: By only investing a certain amount each month, you'll buy less shares of a company when shares are expensive and you'll buy more shares when prices are cheap. This investing strategy, also known as dollar cost averaging, can take the worry out of trying to time a company's performance.
- Discounts: There are about 100 companies that allow investors to purchase stock at discounts of 3% to 5%, sometimes even as high as 10%.
Of course, there are some downsides too.
Risks and the Final Word
But there are only a couple of things you'll need to consider…
- Limited Companies: Out of all the publicly traded companies out there, only 1,100 offer DRIPs. This might be a limiting factor to be able to invest in the companies you really want to.
- Taxes: When you receive dividends from a DRIP, those dividends are taxable as income by the Internal Revenue Service. Furthermore, you're also responsible for keeping track of your records. This record keeping can become a lot to track over the long term.
At the end of the day, the advantages of DRIPs over the long term outweigh the disadvantages.
For long-term dividend investors, I think they're really a no-brainer.
You're reinvesting dividends and "dripping" money into your holdings every month, without paying what you normally would in brokerage fees.
And growing and saving your money for the long term is what we at Investment U are all about.
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