How to Start a Drip in Stock for Beginner Investors

Many investors, especially beginners, might be wondering what’s the best way to grow their wealth in the stock market. It’s a common goal, and one popular strategy is a Dividend Reinvestment Plan (DRIP). But what is a DRIP in stock and is it right for you? “Drip in stock” simply refers to a DRIP. This plan lets you reinvest the cash dividends you earn from a company right back into buying more of that company’s stock.

Understanding DRIP Investing

Instead of receiving a cash payout when a company you own shares in declares dividends, a DRIP automatically takes those dividends and buys more shares. Imagine owning a fruit tree; instead of just enjoying the fruit, you plant the seeds back to grow more trees, giving you even more fruit later.

This way, your investment grows over time through the magic of compounding. Basically, the more shares you accumulate, the more dividends you receive. The process keeps repeating itself, amplifying your potential returns over time.

Benefits of DRIP in Stock for Investors

Let’s break down some compelling advantages of using DRIP in stock: Investopedia provides great insights on how DRIPs work. It explains how this strategy can help dollar-cost average the price at which you buy stock.

Dollar-Cost Averaging: With a DRIP, you buy additional shares regardless of the current stock price, averaging your purchase price over time. This can protect you from buying high and selling low.
Reduced Fees: DRIPs typically allow you to reinvest dividends without paying brokerage commissions or fees. This saves you money and boosts your investment return.

Convenient Automation: It’s completely automated. The process runs seamlessly in the background, saving you time and effort, making sure you’re always investing even if you forget.
Long-Term Growth: DRIP is a classic long-term investing strategy. It’s designed for those who aim for steady growth and aren’t looking for quick profits. The power of compounding is its biggest selling point. Your initial investment keeps generating more income, which in turn generates more income, and so on.

Types of DRIP Plans

Now, there are two main ways to get into a DRIP program. You can sign up directly through the company that’s issuing the stock, or through a brokerage firm.

Company-Sponsored DRIPs: Contact the investor relations department of the company you are interested in. Some companies offer DRIPs to existing shareholders. They might set minimum purchase amounts for new investors, while some are open to everyone.
Brokerage-Sponsored DRIPs: Many brokerages allow clients to reinvest dividends from the stocks held in their accounts, such as Charles Schwab. You’ll often find this option within your brokerage account settings.

How to Set Up DRIP in Stock:

Setting up a drip in stock is easier than you might think. The specific process varies slightly based on whether you go through a company or a broker. But don’t worry, here’s a general guide:

For Company-Sponsored DRIPs:

Check for Availability: First, make sure the company you’re interested in offers a DRIP plan. Usually, they have this info on their website under investor relations, or you can just call them directly.
Open an Account: Once confirmed, you might need to open an account with the company’s transfer agent, which is often a separate entity that manages the shareholder records. Some examples of transfer agents include EQ Shareowner Services and Computershare.

Enroll: You’ll need to fill out an enrollment form, typically found on the transfer agent’s website, specifying how you want to participate in the DRIP.

For Brokerage-Sponsored DRIPs:

Locate DRIP Settings: Log into your brokerage account. Most platforms will have a dedicated section or setting for DRIP enrollment, often under “Dividend Options” or similar.

Select Participating Stocks: You can usually choose which stocks you want to reinvest dividends from within your portfolio. Be sure to confirm that the stock qualifies for their DRIP program.
Confirm Enrollment: Carefully review and confirm your DRIP selections. That’s it, it’s usually pretty straightforward from this point onwards.

Factors to Consider Before Using DRIP in Stock:

Even though a DRIP plan seems attractive, it’s important to make an informed decision. Consider some important factors before enrolling in a DRIP.

Taxes: Although dividends are reinvested and you don’t receive the cash, they’re still considered taxable income by the IRS. You will need to pay taxes on the reinvested dividends. You’ll need to pay these taxes from your own funds since you didn’t receive the cash payout.
Liquidity: Shares bought directly from a company through DRIP might not be as easy to sell compared to those purchased on the open market. To sell those, you often need to contact the transfer agent or follow a specific redemption process.
Company Performance: Keep in mind that the effectiveness of your DRIP investment is tied to the overall performance of the company. A poorly performing company won’t offer significant dividend growth or share price appreciation. It’s crucial to monitor the company’s performance and consider adjusting your DRIP strategy as needed.

DRIP in Stock – Example

Here’s a simple illustration to better grasp how DRIP works: Suppose you have 1,000 shares of Apple Inc (NASDAQ: AAPL), which are priced at $200 per share. Apple announces a quarterly dividend of $1 per share. Without a DRIP, you would get $1,000 in cash ($1 per share x 1,000 shares).

However, if you’re enrolled in Apple’s DRIP plan, that $1,000 is used to buy additional shares. Assuming the stock price remains at $200, you will now have 5 extra shares ($1,000 ÷ $200 = 5 shares). This will increase your total shareholding.

The beauty of this is that in the next quarter, these additional shares will also be eligible for dividends. You’ll be getting dividends on more shares, even though you technically didn’t spend any more of your own money. This example demonstrates the compounding effect. Many investors view DRIP as a good way to gradually build wealth over the long haul.

FAQs about DRIP in Stock

What does “DRIP” stand for?

“DRIP” is an abbreviation of “Dividend Reinvestment Plan”. It’s an investment plan that lets shareholders reinvest their dividends back into purchasing additional shares of the same stock.

Conclusion

DRIP in stock is an investment plan for gradual wealth building through the power of compounding. Investors save money on fees and it makes investing in dividend stocks in April and dividend stocks in September easy. DRIP, in essence, empowers investors to snowball their investments over time. Just be sure to assess the suitability of a DRIP based on your own financial situation, investment goals, and tolerance for risk. Understanding its mechanics, pros, cons, and various elements can lead to smarter investment decisions, whether you’re starting out or looking for ways to boost long-term gains.

Disclosure: This content is for entertainment purposes only. Please consult with a financial expert before making any financial decisions.