What Is a DRIP, and How Can You Take Advantage of One?
You may have heard the acronym DRIP before. But what does it mean?
Well, DRIP stands for dividend reinvestment plan (or program).
Now, that’s still a pretty big term, so let’s break it down a bit further.
What is a dividend?
Companies have shares and stocks that they trade on the market. Old school companies like BHP pay a dividend to their shareholders.
That means that each year, shareholders get a little bit of cash, called a dividend.
New tech companies don’t usually provide dividends because they say they need the cash to grow their companies instead.
Why be part of a dividend reinvestment program?
If you like the company, why would you just take the cash when you could put it back into the company, helping grow your investment?
Reinvesting makes sense, particularly if you’re confident in the investment, and it’s already done very well for you.
By taking advantage of a DRIP, you are just refeeding those cash payments back into buying more stock. It’s like the power of compounding, but with a stock. Over time, that effect can be tremendously beneficial.
I’ve seen people gain massive money just using DRIPs.
So, that’s why you would want to use it.
How do I become part of a dividend reinvestment program?
There are three ways you can become part of a DRIP. The first is through the company directly.
DRIPS through a company.
First, find out if the company does have dividends. Then, find a contact number for the company. Look for their investor relation department or ask to be put through to them.
Talk to them and ask to become part of their dividend reinvestment program.
With this method, you invest directly with the company, not on what they call the secondary market (what most people call the stock market).
In general, when people talk about trading, they go through a broker. They trade on the open market. But when you deal with a company, you’re just trading directly with them. There’s no secondary market. It’s direct, which is a win-win for you and the company.
Here’s an example of how it works.
Let’s say you have invested $1000 in this company. They give a dividend of $10 a year. That’s fantastic. But the price of one stock might be $100. Now, what do you do? Do you wait 10 years to reinvest?
No. When you directly invest with the company, they’ll take partial shares, and they’ll accumulate that for you, so you don’t have to worry about saving up and buying those whole shares.
DRIPs through a broker.
The second process for dividend reinvestment is to go to a broker. You just tell the broker, every time I get a dividend, I want you to buy more stock.
The difference here is that you can’t buy partial shares.
You’ll have to wait until the cash accumulates to purchase at least one stock. In this case, the broker will have a cash account for you where that money sits until there’s enough to buy more stock.
The third way is to do it yourself. You have an online account, and you notice, oh, I’ve got a nice little bit of cash; let me put it straight back in and buy more stock.
But again, you can’t buy partial shares this way. You need to wait until you have enough to purchase more stock.
When it comes to DRIPs, remember…
- DRIP stands for dividend reinvestment program—it is a program where dividend yields paid to investors are reinvested straight into the company.
- You can participate in a DRIP directly through the company—by reinvesting through the company, you can own partial shares.
- You can ask your broker to reinvest for you—but you will have to wait to accumulate enough cash from your dividend yield to purchase at least one stock.
- You can reinvest through your online investment account—but you won’t get partial shares.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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