Q: What is a DRIP?
A: A DRIP is a dividend reinvestment program offered by public
corporations that allows individual shareholders to reinvest
dividends, and sometimes make direct contributions, in order to
purchase additional shares of stock.
Q: What is the difference between a DRIP and a DSP?
A: A DRIP, or dividend reinvestment program, allows for the reinvestment of dividends for the purpose of purchasing additional shares of stock. A DSP, or Direct Stock Plan, allows individuals to purchase stock directly from a company. There are only a few hundred companies that sponsor DSPs, but the trend appears to be that more and more companies are offering DSPs.
Q: What companies have DRIP plans?
A: DripAdvisor has a complete listing of all the companies that offer DRIP plans, along with the necessary contact information, as well as powerful research tools. You can browse the complete company listing by clicking on the following link:
Q: I've decided I want to start a DRIP plan, but I don't know which company to invest in. How do you pick which company to start with?
A: Picking the actually companies to invest with is probably the most difficult task with DRIPs. The most prudent thing to do is invest in multiple companies across different industries in order to diversify and limit risk. However, if you don't have the means to invest in several companies to begin with, and can invest in just one, it's best to choose a company from a relatively stable industry such as energy, food, or pharmaceuticals. Additionally, DripAdvisor provides a weekly review of a selected company that offers a DRIP plan.
Q: Why should I invest in a DRIP instead of a mutual fund?
A: Mutual funds can be a good way to invest for the long-term, but the benefit of DRIPs are their low costs and fees. Mutual funds charge a lot to manage your money, and most of the time the fund managers don't deserve those fees because of their poor performance relative to the broader market. Also, investing in DRIPs gives the individual investor greater control over the types of risks they're willing to take along with what types of companies they want to invest in. A collection of DRIP plans can collectively form a mini mutual fund for the investor willing to put in the time and effort to take control over their financial future.
Q: Are DRIPs a good way to save for retirement?
A: Because of the taxable nature of dividends, DRIPs should be the second choice in retirement savings. The first, of course, should be a tax sheltered savings plan such as a 401k or IRA. Once you've maxed out your retirement savings plans, DRIP plans should be the next step taken towards retirement savings because of their cost-effectiveness.
Q: Do I have to pay taxes on dividends, even if I reinvest them instead of receiving cash?
A: Yes, dividends are very much taxable, whether they are taken as cash or reinvested to purchase additional shares in a company.