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What is a DRIP?

Fact Scenario

Elaine is setting up an account with a new broker. In her portfolio, she has several stocks, a few mutual funds, and a certificate of deposit. Her broker has inquired as to whether she would like to participate in a DRIP to the extent it is available.

What Is A DRIP?

The acronym “DRIP” refers to a dividend reinvestment program. By participating in a DRIP, an investor can use his or her dividends on shares of stock in a corporation to purchase additional shares of stock. Once an investor enrolls in a DRIP program, the reinvestment process occurs automatically without the necessity of any additional action on the part of the investor.

In order to begin participating in a DRIP, an investor must first own one share of stock in a corporation that offers a DRIP. An investor should research a number of different companies with DRIP programs. The key is to find a company with an established record of long-term growth. In fact, most companies that offer DRIPs provide brochures for investors to review.

An investor may make the initial purchase of stock in a company by utilizing the services of a broker or, in the alternative, through the use of an online investment service. Then, the investor can elect to participate in the DRIP.

Benefits

The benefits of a DRIP are as follows:

  • An investor can start with a very small investment – just one share of stock in a company that offers a DRIP is enough to start participating in a program.
  • By participating in a DRIP, an investor can continue to invest in a company without paying extra fees or commissions to purchase additional shares of stock. It is a low-cost way for an investor to increase his or her investment in a company’s stock.

For more information on DRIPs and companies that offer DRIPs, consult the financial pages of the newspaper and/or online resources on investing. A significant amount of information is available on such programs.


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