While a drip can be annoying while you’re trying to sleep, it is anything but that when it comes to investing. It may even be a sweet sound of money accumulating as you sleep.
DRP or DRIP are the acronyms for Dividend Reinvestment Plans. Companies offer shareholders a way to reinvest in the company stock using a transfer agent and bypassing the services and cost of a stock broker.
If a company offers such a program, then any shareholder participate. These programs are typically offered by larger companies that typically pay dividends. A shareholder benefits from owning an equity investment from the possibility of capital appreciation (buying low and selling higher) and from cash flow distributed to stockholders in the form of dividends.
Companies offering such DRIPs will give a shareholder the option to receive their dividends in the form of cash or using the cash to buy more shares of the company stock. This process may be familiar to mutual fund investors who choose to reinvest dividends distributed from the mutual fund company to buy more shares in the mutual fund.
In addition to buying company stock from the proceeds of dividends, some companies also offer optional cash purchases programs (OCP). If you work for Raytheon, HP or GE, for instance, your employer provides a way for you to buy the company stock from amounts you may have deducted from your paycheck.
Participants in such plans in the US are listed as “registered” shareholders through a transfer agent. In the old says, this would have required a shareholder to hold onto the original stock certificates but now this is not necessary as the transfer agent keeps track of all shares in their “book entry” record keeping system.
By purchasing at least one share of a company’s stock, an investor becomes eligible to participate in these plans.
They are a cost-effective way to build a long-term position in a brand name company using “dollar-cost-averaging.”
These can be an ideal gift to young child or even to help supplement your retirement.
For instance, if you invest $50 per month from a child’s birth to their 18th birthday, you would have invested $10,830 and your investment could be worth nearly $30,459 assuming a 10% annual return (capital appreciation and dividends).