Dividend Reinvestment Plans
Increasing numbers of corporations allow existing holders of shares of stock to reinvest their dividends (known as DRIPs) in more shares of stock without paying brokerage commissions. In some cases, companies allow you to make additional cash purchases of more shares of stock, also commission-free.
In order to qualify for most DRIPs, you must generally have already bought some shares of stock in the company. Ideally, you bought these initial shares through a discount broker to keep your commission burden as low as possible. Although DRIPs reduce your stock commissions on future purchases, DRIPs have their shortcomings:
1. You need to complete a lot of paperwork to invest in a number of different companies’ DRIP stock plans. Life is too short to bother with these plans for this reason alone.
2. Some companies that offer these plans are hungry, for whatever reason. They need to drum up support for their stock. These investments may not be the best ones for the future.
3. DRIP plans don’t eliminate fees. You still pay fees to buy the initial shares of stock, and many DRIP plans charge nominal fees for additional transactions and services. Taking these shortcomings into account, you’re better off in the long run using professional money managers, such as those available through the best no-load, cost-efficient mutual funds.