I was introduced to stock investing and the Dividend Reinvestment strategy through Vita Nelson, the editor of the Moneypaper. Ms Nelson ran recurring TV commercials where she briefly explained that people could begin a dividend reinvestment portfolio (DRIP) with very little money. She then went on to say that investors could grow the portfolio by reinvesting the dividends and making additional affordable payments on regular basis. She ended the commercial by saying that if you get started in a dividend reinvestment plan “you will be doing yourself the biggest favor in the world.” That last quote was the hook that caught me, and I will be forever glad that it did.
Why Start a DRIP Portfolio
A DRIP portfolio is an easy way to buy securities learn about the stock market, and if you are persistent, and have a good strategy you could amass a great deal of wealth. For instance, a $500 monthly investment that earns a 10 percent annual return grows to $1,139,663 over 30 years. A 10 percent return is possible because the S&P 500 stock market index has averaged an 11 percent return since its 1957 inception. When you start a DRIP portfolio, you will be able to buy stocks in well-established and reputable companies like Coca Cola, Wal-Mart, Mc Donald’s and AT&T. Normally you will only need to complete an enrollment form and send in a payment to get started. Often times there are enrollment fees or first time purchase fees (usually not more than 25.00 (USD)) when you enter a program.
Related: Is a Stock Repurchase Better than a Dividend?
The Mechanics of Starting a Dividend Reinvesting Portfolio
For those who are interested in starting a Drip portfolio, the first thing that they will want to have is a list of the companies offers DRIP plans. One place to get that list is at the DRIP database.com. Once you have decided on a company or companies that you are interested in you have several choices about how to get started.
The Easiest Way
One of the best things about a DRIP portfolio is that you can start one with very little effort. The easiest way to get started is through an organization like the Moneypaper. The Moneypaper acts as an intermediate that buys shares of companies that you choose, through the appropriate agents and transfers them to you for a single check and a small fee. Once you become a member of a company’s DRIP that company will send you quarterly statements advising you of your share balance, you’re most recent dividend payment and the value of your investment. The statement will provide a bill payment stub which you can use if you choose to buy additional shares.
Through The Company
A second way to open a DRIP account is through a company run DRIP. Some companies sales stock shares directly to investors from the corporate headquarters. You can check a company’s website to determine if they offer this service. Companies that run DRIP programs are usually investor friendly and often wave account setup fees, investment fees, and dividend reinvestment fees.
Related: Is There Still Room in Dividend Stocks?
A third way to get started in a dividend reinvestment program is through a transfer agent. This is probably the most common way of starting a DRIP account. Transfer Agents manage the DRIP accounts of many large companies. As financial institutions, they can efficiently handle account transactions and send out brokerage statements. Often when you check the website of companies that offer DRIP’s you will be given instructions, (see example) to go to a specific transfer agent to enroll in their DRIP program. Large transfer agents such as Computershare, BNY Mellon, Boston Equiserve and first Chicago Trust will provide investors with a list of the companies whose DRIP’s they manage. They also provide enrollment instructions, fee schedules, stock research and stock prices. Personally I prefer to buy through a transfer agent because you can see your portfolio online, and they take care of important tax information, such as cost basis and dividend income. As your DRIP portfolio grows this is a service that you will greatly appreciate.
The fourth way to start a DRIP portfolio is through a brokerage firm. Some brokerage firms will allow for dividends to be reinvested for no fee even for companies that do not have formal DRIP’s. One of the chief drawbacks in brokerage run DRIP’s is if you buy additional shares you will have to pay brokerage fees, and growing your account while avoiding expensive fees is the primary reason for having a DRIP account.
Related: How to screen and pick solid dividend paying stocks for the long run
Starting a DRIP portfolio is an affordable and measured way for small investors to grow a portfolio with the stocks of blue chip dividend paying companies. I agree with Vita Nelson that by starting a DRIP you could “be doing yourself the biggest favor in the world”.
Darnell Brown is an accountant with over 20 years of auditing experience. He has worked in both the private sector and for the United States Government. He currently works as a freelance writer and has written numerous financial articles for the investmentunderground.com website.