The Reference Section

A collection of wealth improvement articles


DRIPs: Should you consider this investment technique?
DRIPs

Have you ever considered setting up a dividend reinvestment plan (DRIP)? Now may be the time to think about doing so. Current tax law makes these plans more appealing than ever.

What is a DRIP? DRIPs allow you to build your portfolio by using all or part of your dividends to purchase additional shares of stock in a company. One advantage to these plans is that they allow investors to avoid brokerage commissions when acquiring additional shares of stock. Furthermore, many plans grant discounts off the current price of shares purchased with dividends, thus creating an instant return.

Another nice feature is that many plans allow you to make cash investments to purchase shares, sometimes in amounts as little as $25 per month. Because DRIPs allow you to invest in small increments, they often appeal to small investors.

Investigate before you act. Before establishing a plan, review the inherent risks and limitations to make sure that a DRIP fits into your overall investment strategy. For example, even if companies increase their dividend pay-out amounts, the dividends alone will most likely not build a large portfolio. Also, it is difficult to build a well-diversified portfolio using DRIPs Instead, DRIPs should complement a core holding of stocks and fixed-income products.