Dividend Reinvestment Plans

Jim Cramer loves companies that make dividend distributions — because as a shareholder, a.k.a. owner in the company, he believes you deserve your piece of the profits. Which is exactly what dividends are.

And now is the season for quarterly dividend announcements. Dividends are in the air. But what should you do with those quarterly dividend checks? Cash them and go shopping? As fun as that sounds, it’s not doing much for your portfolio. Have you considered a dividend reinvestment plan, a.k.a. a DRIP? Many of you have asked questions about these, so apparently DRIPs are on your mind. Basically, if you plan on holding a stock for a while, you probably should be a part of the company’s dividend reinvestment program. But even if you’re an active trader, a DRIP can still be a great way to add shares to your position without extra fees. So let’s dissect the DRIP.

 

What’s a DRIP?

It would be so easy to make an ex-husband joke here — but I’ll restrain myself. Simply put, a dividend reinvestment plan is a way for shareholders to reinvest their dividends back into the company. Instead of getting those dividend checks sent home, the company keeps the money and buys more shares for you. Take note: Even though you’re no longer getting those checks in the mail, those reinvested distributions are still taxable income to you. You can’t escape Uncle Sam. Reinvesting your dividends can make a huge difference in the amount of shares you hold over the long haul. “You could end up with as many as two or three times as many shares as you started with,” says Bob O’Hara, vice president of development at BetterInvesting, a nonprofit long-term investing advocacy group. Here’s the bigger upside: Since you’re buying the shares directly from the company, there are no broker fees for the purchase. Yippee! And you usually only need to own one share of a company’s stock to be a part of its DRIP. That’s why everyone should start giving little kids shares of stock for special occasions. My stepbrother gave my daughter a few shares of Coca-Cola when she was a baby. I reinvest the dividends for her and, although she’s only 2 1/2, she’s got quite a little portfolio. Brilliant. But my precious little girl is not the only one benefiting from these DRIP plans. Clearly, there must be perks to the companies that offer these plans as well. Of course, to start, they have immediate access to your money. When you buy a share on the open market, you’re essentially buying it from another seller. With a DRIP, you purchase right from the company so your money is immediately in their hands. In addition, companies like a solid shareholder base. If you’re a DRIP investor, you’re pretty committed to the stock. If the market goes down or a negative one-time event happens, you wouldn’t be as quick to jump ship as someone who didn’t have as much of a vested interest in the place.