What is DRIP investing?

DRIPS stands for Dividend Reinvestment Plan and are often introduced by publicly traded companies to encourage the smaller investor to purchase their stock. As the name suggests, the share dividends are automatically reinvested into the stock in order to buy more shares in the company. There are a number of advantages to this scheme for both company and investor, and one of the biggest pulls for the investor is that there are usually no fees involved with the purchase of DRIPs as well as the minimal investment that is required (a good search on the Internet will find companies who will allow investments of only $10!).

The advantages of DRIPs for companies.

There are several factors that make DRIPs an appealing option for the publicly traded company and each of these should be considered before deciding on the option a company takes.

Small investors, or individuals, are much more loyal than big companies. It is very unusual for a small investor to buy stock and then sell it again within a matter of days or even weeks. This loyalty promotes good stock price stability and will mean less fluctuation in the price of the stock. These same loyal small investors generally make for very good customers too. They believe that by giving the company their own business they will be encouraging others to do so and are giving themselves a little something back.

Once a company has a good amount of DRIP investment in their stock, they are able to borrow money against this capital and thus avoid getting a bank loan. This is an effective and cheap way to borrow money.

The advantages of DRIPs for the investor.

Many small investors can be crippled by minimum purchases and by trading fees but it is very unusual to see a large minimum investment with DRIPs and also unusual to see trading fees being charged at all. Because the companies know that small investors usually remain loyal for a long time they are able and willing to offer greater incentives to these investors. It is commonplace to see companies offering a range of benefits which may include the possibility to invest a set amount of money on a monthly basis; a very good way to build your assets and stock size.