Understand the pros and cons of DRIPs

Appropriately enough, investors may notice a slow trickle in earnings from “dividend reinvestment plans” (DRIPs). But these investments may end up providing a steady stream of income over the long run.

The concept is relatively simple. More than 1,000 companies and closed-end mutual funds around the country offer DRIPs to their shareholders. These programs enable shareholders to purchase stock directly from the company by automatically reinvesting dividends in additional shares. Many DRIPs also allow you to voluntarily make cash payments directly into the plan to buy even more shares.

Here are some of the main attractions of DRIPs.

  • Most DRIPs don’t charge any fee, or only a nominal fee, for purchasing shares.
  • Participants may be able to purchase stock at a discounted price. The discount usually ranges from 3% to 5% and could be as high as 10%.
  • The DRIP may allow you to send optional cash payments (OCPs), often for as little as $10, directly to the company to buy additional shares. OCPs are often used to purchase fractional shares, thereby enabling investors to acquire blue chip stocks they might not otherwise be able to afford.
  • It’s easy to join in. Once you’ve chosen a particular stock, check to see if it has a DRIP. The company will furnish the specifics, including a prospectus and the appropriate application forms.

But that’s not to say that investing in DRIPs is without drawbacks. There is a growing trend within the industry to charge a small fee for acquiring shares. Minimum amounts for purchases may be required. Also, the dividends that are reinvested are treated as taxable income, even though you don’t currently receive any cash.

Consider all of the implications of investments in DRIPs before including DRIPs in your portfolio.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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