General Question

BronxLens's avatar

What are the pros & cons of Dividend ReInvestment Plans (DRIP)?

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4 Answers

srmorgan's avatar

It is really very simple.
The assumption is that you are receiving dividend income from stocks that you already own. These dividends are generally odd amounts of money—14 cents per share, 28 cents per share and are paid in odd amounts $25.35 or $54.22 and the natural tendency is to put these checks in the bank and spend them.

With DRIP the company that is paying the dividends does not issue a check to you, rather it issues stock to you equal to the value of the dividend. Say you own 100 shares of General Mills and it pays 28 cents per share every six months. Mid-year the check is for $28.00. If their stock is selling at $56.00 per share, General Mills makes a bookkeepping entry and instead of issuing a check, issues .5 (one-half of a share) in your name.

Since most dividend income less than $1,500 is not taxable to you, you can purchase stock using the entire dividend without worrying about paying tax.

The advantage is that you slowly and steadily grow your ownership of additional shares in this company and your purchase is from dividend income and not from out-of-pocket funds.

You pay no commissions, brokerage fees etc to a stockbroker although you might have to sell your shares through a broker at some time in the future.

The link that you show is a pretty good snapshot of what this is all about. I don’t have time to go into dollar-cost averaging but overall thisDRIP is a good deal.


BronxLens's avatar

Thanks SRM. Your answer got me to a site that touches on dollar cost averaging as related to DRIPs.
As the lesson of the day, for a few minutes of reading, between your explanation
and these 2 sites not a bad ROI on my time LoL.

srmorgan's avatar

Always enjoy helping out a fellow Bronxite…....

gailcalled's avatar

I have used DRIPS as a technique since I retired. I have bought mostly income-producing blue chip (rather than growth), seeing that I am averse to much risk. I have my broker reinvest half the dividends each year and I take the other have as income. No paper, and I can read the database online from my broker every day or every 20 minutes if I am feeling particularly terrified.

It is a conservative mode of investing, but this past week I have been relatively happy. I would not have the patience to do the bookkeeping for dollar-cost averaging, personally.. And remember that I do speak as a retired person.

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