Friday, March 27, 2009

How to Buy DRIPS

If you want to start buying DRIPS immediately, you have come to the right place. Most companies you can just visit there website, and conduct a search on their site for dividend reinvestment programs. You may need to search for (DRIP, DRP, DSP), some companies may call it different names but its all the same thing.

There are many sites out there that will sell you them but usually they will have a fee or some sort of commission. I suggest sticking with the company website.

After you search on the website of the company you would like to buy from and click on it, then there will be a long explaination of every detail and all the ins and outs of that certain companies DRIP. They usually aren't all exactly the same so you should at least skim to make sure you agree with everything thats on there. Then you will have to accept the terms and conditions.

After you complete that section, it will ask if you would like the form where you fill in your personal information mailed to you or if you would like to complete it online. (You can also just print out the form and mail it in). The down side to mailing it is that you will, one have to wait for the mail to come in, and two you will have to write out a check and pay for postage.

If you opt to complete the form online, most companies will offer that you can pay by debit, credit, or just give them an account number. If you give them you bank account # and information you will have to wait about 2 business days so they can make deposits of about 10-20 cents into your account. Then you will have to login to the companies website again and state the amounts that were deposited into your account.

There is usually a minimum balance for a purchase of a DRIP, the DRIPs I bought were a minimum perchase of $250(they can range from $100 to whatever the companies want it to be). The companies set a minimum because it costs money to keep track of all of the accounts and they don't want to pay people to manage accounts of $10.

After a few days you will receive a letter in the mail stating how much stock was perchased with your initial deposit. Usually, this letter will include an envelop in which the company wants you to mail a check back to buy more stock. This is not required, you could just let your initial deposit build upon itself forever.

When it comes time to sell the stock, for whatever reason, there will be a small fee for selling the stock(usually about 2%). That is because they waived the fee to buy the stock in the first place.

When you sell the stock they will either send you a check via mail, or make a deposit to the bank account from which you bought the stock.

Types of DRIPS

Company-run: Many companies run their own DRIPs. These are often the companies that allow you to buy directly through them without requiring you to first own a single share. The company-run DRIPs are bought from corporate headquarters.

Transfer agent-run: As managing DRIPs can be time consuming, most companies have third parties do their dirty work, called "transfer agents." Transfer agents are financial institutions that run DRIP programs for many companies. Because they can use the same resources for a number of customers, transfer agents can often provide DRIP management services at a lower cost than the company could offer by itself. Some of the larger transfer agents include Boston EquiServe, L.P., First Chicago Trust, and Chase Mellon.

Brokerage-run: Some brokerages will allow shareholders to reinvest dividends at no cost, even if the company in question does not have a formal DRIP itself. However, these brokerage-run "simulated" plans apply to dividends only and do not permit optional cash purchases as most company, sponsored DRP plans do, and optional cash purchases are a large part of what makes DRIP plans so attractive.

Advantages of DRIPS

You don't need a lot of money to start. Usually owning one share or a minimum investment($250) is all that is required to enroll in a DRIP.

DRIPs are a cost-effective way for investors to put stock dividends to better use, purchasing more shares of the company, than getting the check in the mail and putting it in a savings account. Most DRIPs allow dividends to be reinvested at no cost to the investor.

Most companies allow investors to purchase additional shares through a Dividend Reinvestment Plan for small fees, or no fee at all. Usually the company will allow you to send money to them to buy more stock, most of the time a minimum of $10 or $50 is required.

About 100 companies have DRIPs that allow investors to purchase stock at a discount to the current market price. These discounts can range anywhere from one to ten percent.

DRIPs "force" investors to buy stock on a regular basis and hold on to that stock. As a result, investors adopt a long-term horizon and often invest small amounts of money on a regular basis, money that they usually don't even miss. Nearly 200 companies also offer the option to make periodic DRIP investments through automatic debits from bank accounts, so you don't have to break out the check book!

Also, one of the biggest advantages is the company will buy fractions of stock for you. Such as, 5.234 shares, that way instead of getting a 3% dividend on 5 shares you get the dividend of 5.234 shares. This may not seem like a lot, but after five years and you are getting compiling fractions, you will be pleasantly suprised.

No comission! Lucky you, there is no commission when buying stocks through the company because they own them in the first place. Most of the time there is a small fee for selling off your DRIP, but this program is intended for long term usage not daytrading.

What are Dividends of stock?

Dividends are payments made by a corporation to its shareholders. This is usaually done quarterly(every three months). It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend.

What are Dividend Reinvestment Plans?

Dividend Reinvestment Program (DRIP, DRP, DSP), besides being a mouthfull, is a way to buy stock directly from a company. The name comes from the fact they use the paid diviend to buy more of the same stock. This way investors can start investing small early on and your investment will grow over time.