Dividend Reinvestment Plan, or DRIP in short, is a plan allowing investors to use the dividends received from their portfolio to buy additional shares or fractional shares on the dividend payment date. Brokerage firms usually charge little or no commissions for such purchases.
Let us take a look at the opportunities of enrolling in DRIP.
Benefits of DRIP
There are lots of benefits of DRIP that an investor can reap by enrolling in the program
- Saving on commission. Many brokerage firms offers the purchase of the additional or fractional shares at little or no commission. The low or no commission allow the investor to increase their portfolio without having to worry that their profits will be reduced by the commission.
- Starting small. As the saying goes “Better to start early than never“. This is especially true in investment. Many people claim that they would start their investment whenever they have enough cash or when they have a windfall. The smarter investor will try to put their money to start working, no matter how small the amount is. Enrolling in DRIP increases the investor portfolio. Though it may be a fractional of a share, this investment will eventually reap more profits.
- Automation. One of the most important point why enrolling in DRIP is beneficial to an investor’s portfolio. Unless you are very disciplined, most of the people will tend to spend “what is there” and the dividends paid out will very soon be spent. When the dividends are automatically reinvested, the possibility of spending the dividends is immediately reduced to zero.
Let us take a look at how DRIP helps to maximise your profits using Visa Inc. (NYSE: V) as an example.
Visa pays out a quarterly dividend. Assuming an investor starts off with 100 shares of Visa in March 2012, before the Ex-Date of the March payout, by the end of the last dividend payout in December 2014, his portfolio would have been worth $553.73 more if DRIP was enrolled.
Why not do it?
If enrolling in DRIP can help to increase the profits of a portfolio, why then do people not enrol in it?
- Not knowing the existence of DRIP. Some investors, surprising, do not know the existence of the program.
- Not appreciating the profits. Without looking at the benefits in detail, the profits from the program cannot be appreciated.
- Diversification. By reinvesting the dividends back to the same company will have its own risks. By taking the dividends and personally reinvesting it in future can allow the investor to reinvest the dividends in other companies to diversify their portfolio.
The true benefits of DRIP can only be realised for long-term investments. If your portfolio is targeted at growth stocks, it might be better to better for you to take the dividends and invest them in other stocks or wait till the stock price of the company is more attractive before you reinvest.