DRIPS: A Low-Cost and Minimal Risk Investment Strategy




Those who are risk-averse or have limited funds to invest will find it difficult to build any wealth in the stock market.

In fact, a poll done by Bankrate.com revealed that 36% of Americans don’t even save for retirement. A DRIP, or Dividend Re-investment Plan, can help accommodate these Americans.

It can help minimize the need to rely on an entitlement program (i.e. social security) that’s expected to run out of funds in 2034.

US personal saving rate 1960-2010
This graph shows how the savings rate has be steadily declining with a sharp rise in 2010.

DRIPS

DRIPs
A Dividend Re-investment Plan allows someone to re-invest the dividends a company pays without the investor paying a commission. It’s a real easy, low-cost way for hesitant investors to get into the game and build wealth.

It takes advantage of the compounding concept as well as dollar-cost average investing and is a solid wealth generating strategy.

Case in Point:

Say I buy 25 shares of ABC, Inc. with a stock price of $10 costing me $250 total. And say the stock pays a quarterly dividend of .35 cents per share. After the first three months when it’s time I receive my dividend, I would gain $87.50 which would be automatically re-invested.

Now I have $337.50, or 33.75 shares, that in another three months time will reward me $118.12. This will continue to compound as long as I hold stock in the company. Here’s the compound interest formula used to receive the results: A = P (1 + r/n) ^ nt).

Example:

In ten years it would equal $7,163.26, and in twenty I’d have $205,249.10. This, of course, is dependent on an unchanging dividend amount which we know doesn’t happen, but it’s still impressive.

Dollar-Cost Averaging:

Of course, the share price throughout the life of your ownership of a stock will vary – rising and lowering in the market. So when dividends are paid and are automatically re-invested, you’ll either buy when the price is lower than average or higher, spreading your investing throughout the year (i.e. dollar cost averaging).

Two types of Drips are available to investors:

  • Company-run drips:

These drips allow investors to purchase shares directly from the company with no commissions. This is called a Direct Stock Purchase Plan (DSPP). Only thing, some costs like service and transaction fees maybe required.

Also, they may have a minimum balance to open an account that can range from $100 to $1,000.

  • Brokerage-run drips:

Of course with a brokerage-run drip, investors will have to pay the commission when first purchasing a share. Yet, once the dividends start accumulating, they can be re-invested free of charge.

A few brokerages that offer this plan:

(1) – Scottrade – They have a Flexible Re-investment Plan, or FRIP, that allows shareholders to re-invest the dividends they earn commission-free to stock they’ve already purchase or to new stocks/ETFs that are eligible.

This is actually a very attractive plan as you’re not limited to just one company when it comes to re-investing your commission-free dividends. You just cannot purchase fractional shares. They charge $7.00 per trade.

(2) – Firstrade – With their DRIP program, you can purchase whole, and fractional, shares commission-free that are priced at least $4.00 a share. Only thing is the dividends you earn from a company can only be used to buy more shares of that same company. Trading costs are $6.95.

(3) – OptionHouse: They have an attractive, low-priced $4.95 rate on buying your initial dividend yielding stock. Once owned, you simply email them that you’re interested in signing up, provide some basic info and they’ll set it up for you.

(4) – TD Ameritrade:  You’ll have to contact either by phone or mail that you’d like to enroll in their DRIP program. They do allow dividends to be reinvested to purchase fractional shares which is nice because all your money will be in the market and not just sitting around in an account. An initial trade will cost $9.99.

Become a Wise Investor:

If you are looking to become a stock broker, it’s a good idea to adopt wise investing strategies for your personal finances so that you’ll be better equipped to assist others. Maintaining a decent savings rate and investing a portion in the stock market can generate some great financial rewards.

dividend reinvestment plan DRIPS firstrade optionhouse scottrade
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