What are dividend reinvestment plans?

Three piggy banks in the sky

In my previous post, I listed three things you need to start investing. Number three was opportunities. Sometimes those opportunities are unique, one-off types of things; however, they can just as easily be something that's always been out there but you just weren't aware of them because you weren't paying attention to investing.

Let's explore one of those little-known opportunities — one that's legit, good, and yet often overlooked because it's a little, well, boring. It's name, DRIP, doesn't help either.

DRIP stands for Dividend Reinvestment Program. Simply put, participating companies (and there are hundreds) allow you to use the dividends you earn from them to buy stock directly from the company for little or no commission. (That's how you reinvest your dividends.)

Actually, it's not only the companies that offer DRIPs. DRIPs can be run by their stock transfer agents or brokerages. In my case, I use the Etrade's DRIP program. A DRIP is a set-it-and-forget-it kind of operation, so it doesn't matter too much who does it.

Related >> How to Get Started Investing

The DRIP Keeps Good Company

DRIPs share a unique corner of the investing space with a few other concepts. The cornerstone of this space is blue-chip stocks. Who hasn't heard of blue-chip stocks? But what exactly is a blue-chip stock? Can you name, say, five of them off the top of your head? Tricky, isn't it?

Here is arguably the best investment of all, and most of us simply don't know all that much about it! That's because there isn't a definitive list of the 23 or 57 stocks that make up the “official blue-chip list.”

The closest approximation, and the one probably used most often, is the Dividend Aristocrats. Most blue-chip stocks pay dividends. And only the cream can sustain growing their dividend each year for 25 years or more, through no less than three stock market crashes. (Where were you 25 years ago? That long.) Those few are the Dividend Aristocrats. At the time of writing, there are 51, listed here. Even when the stock market crashes, the dividends keep growing. And, with a DRIP in place, the only effect of a crash is you get more shares. And when the market recovers, like it always does, that puts you in the pound seats, as they say in the Colonies.

Most blue-chip (and other) companies offer a program called a DSPP, which stands for a Direct Stock Purchase Program. A DSPP allows you to buy a few shares from the company itself, not through a broker. That's right — if you want to invest $25 per month, for example, you can buy shares directly from blue-chip companies like Walmart, for way less in commissions than you would have paid a broker. Most companies' DRIPs are part of their DSPPs. While DSPP stock purchases typically carry a small fee, most companies do DRIPs for free.

So here's how all those concepts fit together: The safest stock investments (as a group) are the blue-chip companies called Dividend Aristocrats. If you sign up for their DSPP programs, you can buy into those companies with small amounts each month, for next to nothing in commissions/fees. And if you sign up for their DRIP, you can turn your cash dividends into more shares for no fees or commissions.

Why Do It?

1. You can save money

The low/no commission thing is not trivial. Most discount brokerages will do a purchase for nothing under about $7. If you want to invest, say, $50 a month, the commission alone will eat up 14 percent of your investment. Ghastly. Sign up with, say, Becton, Dickinson (amazing how unknown some blue-chip Dividend Aristocrats are, huh?) and they will charge you zero fees to buy with a DSPP or DRIP. They will charge you $15 per transaction when you sell, though. Almost all DSPP/DRIP companies are linked to Computershare, so that's a good place to get started. (Good news: They cover many countries besides the U.S.)

2. You can start small

Many people say they'll begin investing when they get windfalls. The smart ones, however, don't wait; they start early. Problem with that is the amounts they have to work with are usually small — young-people money. As I wrote earlier, that was my big problem (at least, that's what I told myself at the time). I would have been a lot better off had I known about DRIPs, because this is where they shine: you can invest as little as $25 per month. And if the company's stock is, say, $40 a share, they will sell you a fraction of a share — and pay dividends on that fraction! I'm an avid DRIPper, which is why I now have exactly 606.08274 shares of one of my DRIP stocks. That will change in a few weeks as the first quarter's dividends come in and add a few more shares (and a few more fractions) to that total.

3. It's automatic

All the smart personal finance coaches tell you to automate. Have the money deducted out of your account, preferably before you even know it's there. The human brain has an amazing knack to adjust to what's there. That's why most people who say they'll save “what's left over” never save anything. Most DSPP and/or DRIP plans require an automated, regularly recurring purchase in order to qualify for the low fees. That's because computers are cheaper than humans — if they can automate the whole thing, they save money and pass it on to you.

And the long-term benefit is all yours.

What Holds People Back?

1. Ignorance.

It's amazing how many people simply don't know about DRIPs.

2. It's not diversified.

Unlike a mutual fund or ETF, you only invest in one company at a time. However, you don't pay mutual fund or ETF fees, and you can buy smaller amounts that many of those places require. That means you get most of the benefits with none of the cost. Moreover, because you can buy small amounts at each company, you can make up a portfolio of, say, five to 10 companies.

3. It takes time to set up.

And no two companies' plans are identical. I opted for a brokerage DRIP because they did everything. All I had to do was say, “Yes, please.”

Where Do You Begin?

1. Decide if you even want to do this. DRIP investing is a long-haul thing. If you buy and sell stocks all the time, the savings won't be worth it for you. DRIPs are perfect for those want to let their dividends be part of the growth of the stock they invest in.

2. Research. Because you're picking a handful of companies, you want to spend at least 20 or 30 minutes looking at the company itself. Blue chips may be the best investment out there, but they're still not perfect. Nothing is. A little homework goes a long way.

Google the search terms DRIP, and Dividend Aristocrat, and browse through the Computershare website (link above).

In closing, I've been a DRIPper for quite a while now, and I can recommend it as a solid, long-term investment strategy to anyone. Those dividends come in, and the number of shares you own just grows and grows and grows.

What has your experience been with DRIP investing? Would you recommend it too?

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Jon
Jon
6 years ago

I’ve been using DRIP investing, with an Etrade brokerage account, for about 15 years. It started with the stock in my wife’s ESOP(there’s another subject for an article)plan, and expanded into stocks from the Dividend Aristocrats list in 2009. I picked up some great stocks when most of the world was panicked and selling, and have been letting the dividends compound the growth ever since.

nicoleandmaggie
nicoleandmaggie
6 years ago

We’re fans of dripping our indexes, which includes everything in our retirement accounts. http://nicoleandmaggie.wordpress.com/2011/02/03/dripping/

I don’t drip most of our individual stocks. Eventually I’ll get rid of most of those, except the utility. I like the quarterly cash from the utility.

Wes
Wes
6 years ago

Great article, William! I have used a DRIP program through my Charles Schwab brokerage account for years now, and it’s a wonderful way to dollar cost average your purchases overtime automatically! Automatic saving and investing is of utmost importance for the long term wealth builder!

shihling
shihling
6 years ago

Drip/dspp

Rebecca
Rebecca
6 years ago

I’ve used Computershare which offers a variety of stocks with one service (200+). Many programs that were direct with companies (WMT, JNJ, PG, GE, PFE, PRU) converted to Computershare services. For over 15 years with automatic monthly payments into stocks the dollar cost averaging has been very beneficial as well as lucrative. Automated sell features can assist cash flows or emergency funding within several days. Good article.

El Nerdo
El Nerdo
6 years ago

I normally like William’s articles a lot and can only think up like “ooooh!” and “ahhhh!” in response, which results in me posting nothing; but I just wanted to change that today to say I particularly loved this one. I had never heard of “Dividend Aristocrats” before, and the list is eye-opening. About maybe a year ago I was trying to learn about dividend stocks, and all I could find was very confusing chatter. Now I (finally) know where to find and how to buy solid dividend stocks. Thank you!

David L. Wright @ Dollar Bits
David L. Wright @ Dollar Bits
6 years ago

Really high quality information here.

For people who are unwilling to pay any attention to their investments, I suggest index funds and passive investing, but if you are willing to do a little work, DRIPs with dividend paying stocks are a great way to go.

Ginger
Ginger
6 years ago

I got a little confused. You said you could buy directly from Becton Dickerson but then you said you bought thru a brokerage so do you pay a $15.00 fee for them to buy for you?

William @ Drop Dead Money
William @ Drop Dead Money
6 years ago
Reply to  Ginger

You can buy directly from BD — that was just an example.

I prefer to use my brokerage (for other stocks) because it’s simple. Different example.

The $15 sell fee is for selling only, not buying. Different thing.

Does that help? 🙂

Rigo
Rigo
6 years ago

I felt really hesitant to comment on this article. I am a 24 y.o. without any real experience in investing, but I do like to read up about it. It really gets my blood flowing.

I’ve never heard of DRIP before, but what I read from the article really seems to interest me. What do you recommend or advice someone that prefers long-term over short-term investing and has never invested before? Is DRIP the way to go?

Thanks!

William @ Drop Dead Money
William @ Drop Dead Money
6 years ago

Rigo, DRIP is one strategy, not the only one. It is almost perfectly suited for where you’re at, i.e. with a long time horizon out in front of you.

There are other good strategies, like buying index funds. The best thing is to hit the internet and read up as much as you can, until you find the option that best suits your needs and temperament. 🙂

Alea
Alea
6 years ago

William, can you invest this in a taxable account or stick with this strategy in a ROTH or IRA?

William @ Drop Dead Money
William @ Drop Dead Money
6 years ago
Reply to  Alea

You can do it either way. Just keep in mind: in a taxable account you’ll have to pay income tax on the dividends you receive, even if they’re immediately reinvested.

El Nerdo
El Nerdo
6 years ago

Oh, please let me ask a follow-up couple of questions:

1) If you’re buying dividend stocks as an income/FI asset, how easy is to unplug the “reinvestment” loop and simply start collecting money? What would be the best way to set this up?

2) If I’m not completely confused this afternoon, dividend income is taxed at an average lower rate than “work” income, yes? (Capital gains having something like 15/10/5% tax brackets?)

William @ Drop Dead Money
William @ Drop Dead Money
6 years ago
Reply to  El Nerdo

1) That depends on who you’re doing it with. Each has their own procedures. With Etrade it’s pretty simple (which is my only experience).

That, incidentally, is one of the reasons rich people pay less taxes than working people. But that’s a topic for a coming post 🙂

2) I’m no tax expert, but I think you’re right. Perhaps someone with more tax expertise can weigh in.

Sir. Pog
Sir. Pog
6 years ago
Reply to  El Nerdo

Thanks for posting this question. I was wondering the same thing. If you want to stop the dividend reinvestment and collect the dividends, is that easy/cheap to do?

An additional question: Do some of these options allow you to reinvest a portion of your dividends, while still getting a portion back as a cash payout?

For example, if a company has a dividend rate of 2%, could I allocate half of it to the DRIP program, and receive the other half?

JMV
JMV
6 years ago

I really love DSPPs and DRIPs! I don’t have much money to invest and the automatic plans make it easy. I’ve been in a plan through my electric utility where I invest $100/month for the last 5 years. I’ve invested $6000 and currently have an account value of over $9000. I like the utility stocks because they are stable and pay dividends and the strategy has paid off well for me!

Kasia
Kasia
6 years ago

DRIPs or DRP as known in Australia are a great way to create a passive income. I wish I started earlier with smaller amounts, as the small amounts add up quickly over time. Oh well, lesson learnt and now I’m going to play catch up. I prefer these to managed investment products. Less fees and more control over my own investments. Plus it’s nice to get extra shares twice a year without having to pay brokerage.

carlos
carlos
6 years ago

William,
If you use a broker like e trade and you go with brokerage drips, do you pay a brokerage fee? What about going through computer share is there a fee through them?

Jason
Jason
6 years ago
Reply to  carlos

Carlos,
To answer your question (although I’m not William), most brokers offer free dividend reinvestment. I would be surprised if E-Trade didn’t offer it, but you’ll obviously want to confirm it with them.

mike
mike
6 years ago

Here is a decent article. https://www.wellsfargoadvisors.com/market-economy/financial-articles/investing/dividend-income-tax.htm I like state muni bonds or muni bond index funds better. I pay absolutely no taxes on the interest i receive and it essentially is a drip anyway or Irip with the interest buying more shares of the muni index. I’m getting 4% diversified in PA indexes tax-free thats not too bad. Ultimately I index drip in my tax free accounts so as not to worry about paying 15% in taxes on the dividends. In theory though 15% would be better off then my marginal amount paid. My last dollars fall into the 28%… Read more »

matt
matt
6 years ago

Check out Wells Fargo Shareowner Services as well, Computershare is just one of the stock transfer agents. https://www.shareowneronline.com/

JaM
JaM
6 years ago

There was a time in my early investing stage I wanted to invest in stock but was apprehensive about how to go about it and minimize risk. This is one of the better techniques in cost averaging.

Superb article and worthy of a PF blog. Thanks William for explaining this very clearly.

Thegooch
Thegooch
6 years ago

I’d never do this or recommend it I since I believe strongly in index investing. John C Bogle and Ben Graham, ftw!

Jason
Jason
6 years ago

This is great information that’s helped me rediscover DSPPs, however I find most of them are actually more expensive than using a discount broker. For instance, to invest in GE directly, I would pay a $7.50 setup fee, plus $3.00 per purchase or $1.00 per automatic investment, and finally $10.00 + $0.15/share to sell. You have to invest in GE a number of times over many years for their plan to compare favorably to a discount broker. If you’re not looking to become financially married to a company, there are a number of no-fee DSPPs listed here: https://www-us.computershare.com/investor/3x/plans/planslist.asp?stype=nof Few are… Read more »

Krishanu
Krishanu
6 years ago

I first came to know about DSPP/DRIP almost 2 years ago, through an article in GRS. JD was holding “auditions” for staff writers and Michael Robertson wrote this post => https://www.getrichslowly.org/how-to-invest-using-direct-stock-purchase-plans/

Since then I’ve been an avid investor with Computershare. Thanks William for bringing this investing instrument again in the GRS spotlight.

If investing, and reinvesting the dividends, in dividend-paying, blue-chip companies is your objective, the Vanguard ETF “Vanguard Dividend Appreciation ETF” (VIG) is another option you can look at. This way you don’t have to individually track the companies but be assured that Vanguard is doing it for you.

daren
daren
6 years ago

Great post did not know about drip shares,will definately be looking into this,thanks.

Bari
Bari
4 years ago

Im 61 how long will I see a decent return on a DRIP if I start now?

Joan Kennedy
Joan Kennedy
3 years ago

What fee does Wells Fargo Advisors charge to reinvest your earned dividends back into company that paid them??

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