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Dividend reinvestment plans, known as DRIPs, allow investors to buy stock in public companies and purchase additional shares of stock with dividend payments. Generally, commissions and sales charges are much lower or nonexistent through this type of investing. In addition, the investor reaps the rewards of the power of compounding by consistently reinvesting earnings into additional shares. Not all public companies pay dividends and of those that do pay, not all offer DRIPs. Plans vary by company.
Of the hundreds of public companies in the United States that pay dividends, many offer plans for reinvesting dividends in lieu of receiving cash payments. Most public companies do not handle the transfer of stock shares within the organization, but instead utilize the services of a designated transfer agent. To get started investing in DRIPs, choose companies you are interested in and check to see if the companies offer DRIPs.
Once you have chosen the companies of interest, contact the company's shareholder services or investor relations and request a plan prospectus to learn all the specifics regarding the plan. The company may send you the information directly or refer you to a transfer agent.
Most companies that offer DRIPs have prerequisites for enrolling in the plan. For example, the public company or transfer agent in charge of completing the purchase transactions requires the investor to own a minimum number of stock shares before enrolling in a DRIP. The number of shares required also varies from plan to plan, but owning one share often is enough to begin. Some companies have no requirements concerning prior ownership, which means the investor can enroll in the DRIP through the initial direct stock purchase.
Make an Initial Purchase
Purchase your first shares of stock to become eligible. You may have to use a stockbroker to purchase your initial shares, but once you are enrolled in the DRIP, commissions are no longer applicable to direct purchases in most cases, because most public companies that offer dividend reinvestment plans do so without charging sales commissions. There are a number of well-known public companies in the United States that permit investors to purchase the initial shares directly from the company transfer agent and the company pays the sales charges.
Enroll in the DRIP
During the initial enrollment, the company may require a minimum dollar amount investment or require the investor to agree to contribute a preset amount at regular intervals to buy whole and partial shares of stock. Once ownership is established, dividends on all shares owned are automatically reinvested into whole and partial shares in a DRIP. Some DRIPs may require a minimum dollar amount in additional investments to purchase more shares through an ongoing optional cash feature in the plan. However, the minimal amount required often is only $25 or $50 to purchase more shares in addition to those accumulating through dividends.