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Investing On a Shoestring with DRIPS

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This was a guest post written by Corinna Underwood who is a member of Debt Management Talk, a personal finance forum that shares its revenue with its members.

So you have decided that you want to venture into the stock market but you don't have a lot of savings and you don't want to take any big risks. How can you test the water without cleaving into your budget and still make additional income? Actually it can be done. Even if you only have as little as $20-$30 you can still start buying shares directly from a range of companies including Harley Davidson, Time Warner and Wal-Mart.

One of the best ways to make safe, small investments is through Dividend Reinvestment Plans, commonly known as DRIPS. These plans are currently being offered by more than a thousand companies and most of them have either very low or no fees and you can bypass brokers by buying directly from the companies. DRIPS are ideal if you are just starting out or if you want to make small, regular investments. To become eligible for a Dividend Reinvestment Plan, you usually need only one share of stock.

One major bonus of this type of program is that as you are investing small amounts every month then you are dollar-cost averaging. This means you are reducing your market risk by buying more stock when the price is low and less when the price gets higher. Once you're enrolled into a DRIP account instead of receiving your dividends they will be directly reinvested into the program, so your investment continues to grow.

You do pay income tax on your dividend, just as you would if you had received them but you can add the amount of your dividends to the basis of your stock to reduce your gain when you are ready to sell.

Another advantage of DRIPS is that you buy fractional shares. Your automatic payments are set up to reinvest fixed amounts during each purchasing period. This means that even with the smallest portfolio you can recoup significant gains.

For some, there is a downside to DRIPS, in the fact that you are only permitted to purchase additional shares during the company's Optional Cash Purchase periods which are generally scheduled monthly or sometimes quarterly. Also, checkout each individual company's prospectus, some of them charge commissions on shareholder purchases and reinvestments to cover the expenses of running a plan. You can get hold of a company's prospectus and enrollment form by contacting their transfer agent or investor's relations department.

Advantages of DRIPS

  • You can start with a small amount of money. Just one share is usually enough to get you started.
  • Enrolling into the program is simple; the paperwork is minimal.
  • Many companies will allow you to purchase DRIP shares for very low fees or often no fees at all.
  • Once you are enrolled in a DRIP the process in completely automated and requires little monitoring.
  • There are a number of companies which allow investors to buy shares through DRIPS at discount prices. These discounts range from between 1-10 percent.
  • Because DRIPS allow you to invest small amounts of money over a period of time, you tend not to miss the money so much and you can still develop a long-term investment plan.

You can find a complete list of DRIP companies at InvestorGuide

Posted on August 10, 2007.

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8 Responses to “Investing On a Shoestring with DRIPS”

  1. The Div Guy says:

    I agree that DRIPS are a great way to build up a stock portfolio. I did a post about DRIPS in July with some stocks to consider. I have been adding quite a bit this past week. Here is a link http://divguy.blogspot.com/2007/07/stock-dividend-reinvestment-plans-drips.html

    Also another way to start purchasing stocks is through Zecco. At Zecco you can purchase stocks with no commission.

  2. Jon says:

    I had completely forgotten about this option, and I even part of a DRIPS at the local bank from when I was still in high school. I am definitely going to check out the list you provided. Thanks!

  3. Moneymonk says:

    DRIPS are cool. But they are often overlooked. We invest in DRIPS for my daughter.

    Excellent post

  4. MoneyNing says:

    You can probably get around the fee thing if you do DRIPs through a brokerage. At least for me, etrade doesn’t charge for this service.

  5. Hoobin says:

    Sound like a good idea. Will check out the company list

  6. Jonathan says:

    Has anyone had to deal with the tax accounting with DRIPS? It would seem that with all those fractional shares figuring out your taxes would be a nightmare unless the company figured it all out for you.

    Instead of investing in an individual company and dealing with that risk, these days I’d rather go with a free stock broker and buy some ETFs.

  7. […] Man and Money: Investing on a Shoestring with DRIPS. This is actually a guest post on Lazy Man’s site, and it is a very good primer for […]

  8. […] such a small amount? One way to invest this money for a grand return is to invest through DRPs, or Dividend Reinvestment Plans. These are also known as Drips. Drips or DRPs and Direct Stock Purchase Plans or DSPs allow you to […]

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