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.