Guest Author - Reshma Vyas
Dividend Reinvestment Plans (DRIPs) offer the opportunity to purchase stock from the company (generally, the companyís authorized transfer agent) at nominal cost or in some cases, the fees may actually be waived.
Many publicly traded companies offer dividend reinvestment plans. In most cases, the dividend reinvestment plan is administered by a transfer agent. Often, transfer agents are large financial institutions such as banks. Another variant of the dividend reinvestment plan is the direct stock purchase plan (DSPP) or direct purchase plan (DPP). The direct stock purchase plan enables investors to purchase stock from the company itself without the need for a transfer agent.
Pertinent Factors About DRIPs
1. Just because a company offers a dividend reinvestment plan, does not mean that it is a viable investment. Potential investors should still make every effort to undertake a thorough and thoughtful analysis of the companyís long-term business prospects, its present financial situation and performance within its own industry sector. As with any investment, past performance is not an indicator of future results. Individuals should carefully assess their risk tolerance when it comes to selecting a particular investment.
2. Read the companyís prospectus thoroughly. Every dividend reinvestment plan or direct stock purchase plan will have a different set of requirements and rules. Some DRIPs will allow investors who own at least one share to enroll in the plan. Pay particular attention to the planís eligibility requirements. What are the fees for purchasing and selling shares, if any? Are there any fees charged to maintain the DRIP account? What are the rules for terminating the DRIP? What are the stipulations pertaining to the Optional Cash Payment (OCP)? When does the company reinvest the dividends? Some companies allow the investor to take partial dividends in cash while allowing the remainder to be reinvested. Some DRIPs offer the opportunity to purchase additional shares at a discount to the prevailing market price. However, in many cases, this discount may only extend to reinvested dividends and not the optional cash payment. Individuals should be clear about the distinction. What is the date for the OCP? Some plans purchase stock weekly, monthly or even quarterly. What is the minimum payment for the OCP? Some dividend reinvestment plans and direct stock purchase plans allow investors to purchase additional stock for $25 or less.
3. Keep track of the dividend payment dates.
4. It is essential to keep meticulous records and save all financial statements for tax purposes.
5. Once you select a DRIP, if you are not already a current shareholder, you will most likely have to make the initial purchase through a brokerage firm. The stock needs to be registered in your name as opposed to street name. The brokerage firm will mail you the stock certificates for safekeeping.
1. The comparatively low cost (when compared to full service or even discount brokerage commissions) of dividend reinvestment plans makes it a salient feature for many personal investors.
2. DRIPs offer greater affordability, particularly in terms of the optional cash payment. This may be of interest to individuals who wish to make smaller purchases. One can fill out the OCP form and mail it along with the payment to the planís transfer agent. If the OCP amount is not adequate in terms of purchasing whole shares, then the DRIP will purchase fractional shares.
3. The planís transfer agent will send you the financial statements and may also handle safekeeping of the stock certificates.
4. Many DRIPs offer an automatic investment plan.
5. Some DRIPs may allow participants to purchase stock at a discount to the prevailing market price. Potential investors should be clear about the rules regarding the discount. One should never enroll in a DRIP simply because it offers a discount.
6. Some plans may allow investors the option of enrolling in a DRIP IRA. The fees will vary in accordance to the plan. Potential investors should evaluate the fees carefully, as in some instances, they may actually be higher when compared to a mutual fund IRA or to a non-IRA DRIP.
1. The extra recordkeeping responsibilities involved in maintaining a DRIP account can be a major drawback, especially if an individual is participating in a number of plans.
2. Individuals who participate in a DRIP or DSPP may not be able to exercise any control over the stock price with regard to when the shares are purchased and sold. The inability to take advantage of market timing is perhaps one of the biggest inconveniences of participating in a dividend reinvestment plan or direct stock purchase plan. Stocks can fluctuate tremendously during a time of extreme market volatility. If for example, an individual is enrolled in the DRIP of company XYZ and notices that the stock has fallen significantly in price and sends in the OCP to purchase shares that will not be bought until the following month, it is quite possible that the share price by that time could have risen in value. If the investor wishes to purchase the stock at a specific price, then it would have to be bought independently of the DRIP (i.e., through a brokerage account).
3. Due to the inherent structure of dividend reinvestment plans and direct stock purchase plans, they are not suitable for day trading or short-term trading.
4. Lack of investment diversification may be of possible concern.
For informational purposes and not intended as advice and/or recommendation.