Friday, April 16, 2010

DRIPS and You

You know how I mentioned more on the DRIPs later? Well that "later" is today. DRIPs can be a very economic way of investing in stocks. This is for the average guy that does not have Buffett like earnings. While it will not get you much, it will at least get your feet wet. Almost all DRIPs pay cash dividends which is very important to consider and just about all of them are either blue chip stock (well established) or growth stocks (a rising star!).

The concept of a DRIP is to privately make money with no middle man or commission fees. I happen to like DRIPs because they will reinvest the dividends hence the acronym Dividend Re-Investment Plan. Just think of your portfolio being like a  bucket and the dripping is the water being caught into the bucket. The more dripping, the heavier the bucket, the more bottom line.

There are advantages and disadvantages to DRIP investing. The advantages are that you can contribute a small portion of money for stock (you usually have to buy at least one share) and you can contribute however you like without getting hit up for commission. There is usually a cap on how much you can buy at once, but it can promote cost averaging: a technique of buying stock over a duration of time in order to absorb some of the expense of purchasing it.

The disadvantages of DRIPs is that your are limited on how many stocks you can buy and also dividends will be taxed.  Another thing about DRIPs is that overall there is no real gain or volitility on stocks even though they might be cost effective. Perhaps it is a blessing or a curse, but you are limited in choice as well because some companies are unfortunately getting rid of their DRIP investment plan.

Two known companies that have DRIPs happen to be Wal-Mart and Proctor and Gamble. Wal-Mart's employee DRIP is okay and Proctor and Gamble's has some small start up fees. I heard that our competition, Costco has a DRIP as well, but I do not know if they charge for contributing or not. Normally the charges will be less than the commission for the stock broker, but some campanies will hit you up for additional fees per transaction so be careful.

At any rate, having a DRIP has done nothing, but helped my portfolio. If you do not cash out your stock, you should be able to rack in a few shares from just letting your money work for you every quarter. And word has it, the dividend contributions sometimes rivals a CDs cashflow!