Friday, December 14, 2007

DRiPs - What are they?

One of my favourite ways to invest money for the long term is through my DRiP portfolio. So I thought I would present a series on DRiP investing. This is the first installment.

What are DRiPs?

DRiP is the acronym for "Dividend and Reinvestment Plan". A DRiP is a plan offered by some companies to allow their shareowners to easily re-invest the dividend they receive into more shares of that company, without paying additional fees.

Under such a plan, whenever the company would pays out a dividend, instead of sending you a check for the dividend, it uses that amount to buy additional shares for you. The kicker is that this amount can purchase fractional shares. Those fractional shares, in turn, will also pay out a dividend to you on the next distribution date. This means that you gain the full benefits of compounding. The vast majority of companies that offer a DRiP will reinvest you dividends without charging any fee.

It gets even better. Many companies also offer an additional feature, called a "Share Purchase Plan" (SPP). Under the SPP, you can send additional money to the company to purchase additional shares, without paying any fee. You read that right: invest money without paying fees!

There are some drawbacks to this, though:
  • The shares must be registered to your name. This takes time, and carries some costs.
  • The purchases of additional shares is done at a preset date, so you cannot time the market closely.
  • DRiPs generate a lot of paperwork, and you have to track each purchase.
  • Selling shares in a DRiP takes time.
I will come back to each of those in the next installments of the series.

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