What are dividend reinvestment programs?

Answer 1

Dividend Reinvestment Programs or Dividend Reinvestment Plans are commonly referred to as DRIPs. When an individual is enrolled in a DRIP with a particular company, that means they are a shareholder of that company and generally have an option of having all or part of their dividends used to purchase additional shares of stock at little or no cost to the shareholder.

Usually, there is also an option to still take dividends in the form of cash payouts. For the modest investor just starting out, having dividends of a dollar or less used to buy additional shares of stock won't amount to a lot of extra stock being purchased but the beauty of most DRIP plans is that you can optional purchases of stock without having to pay a broker and, in many cases, you can buy additional shares of stock for very low or no fees what-so-ever. Additionally, optional payments can be made for as little as $10-$50 per month.

By purchasing stock on a dollar basis as opposed to buying a certain number of shares of stock individuals are able to take advantage of a popular investing principal known as "dollar cost averaging".

Most of the time, DRIPs are administered through companies known as Transfer Agents. Transfer Agents deal with the administrative aspects of a company's stock.

There are some exceptions. Proctor and Gamble and Disney both take care of their stock administrations within their respective companies but, the majority of companies use Transfer Agents.

One of the largest Transfer Agents is www.computershare.com where DRIPs are available for companies such as Exxon Mobil, Coca-Cola, Johnson & Johnson, Wal-Mart, Intel, Verizon and Walgreens.

Sometimes companies require a person to already own stock in their company before allowing them to enroll in their DRIP. However, many of those companies will allow you to purchase an initial share of stock or make initial contributions directly from the Transfer Agent. These plans are known as Direct Purchase Plans (DPPs or sometimes DSPP for Direct Stock Purchase Plans).

For instance, to enroll in a DRIP with Exxon Mobil (XOM) you must either already own at least one share of their stock or make a minimum one time purchase of $250 or agree to make minimum purchases of at least $50 for 5 consecutive months. The nice thing about XOM is they charge nothing to set up an account or to make additional purchases and they also charge nothing to have dividends reinvested. They do charge $15 plus 12 cents a share when the stock is sold.

For a company like Johnson & Johnson (JNJ) you'll need to already own at least one share of their stock before enrolling in their DRIP. Probably the easiest way to do this is to employ the services of a company like www.directinvesting.com where they specialize in selling single shares of stock.

One important thing to note is that the stock you own must be registered in your name. Usually, when you buy stock through a broker the stock is registered in what's known as "street name" which means you won't be eligible for a DRIP until the stock is registered in your own name. (stocks bought through directinvesting.com are registered in your own name)

Other Transfer Agents where DRIPs and DPPs are available include American Stock Transfer and Trust Company (amstock.com), Wells Fargo (shareowneronline.com) and Mellon Bank (recently bought out by Bank of New York but found under the quasi integrated site of http://www.mellon.com/mis/investors/index.html).