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Is A Dividend Reinvestment Plan A Good Investment For Me?

 

April 14, 2020 (Investorideas.com Newswire) When you're on the lookout for the best investment options for you, considering all possible avenues couldn't be more important. More people than ever before are investigating the money-making possibilities that investments hold, and are increasingly looking for inventive and profitable ways to expand their portfolios and boost their bank balance. From using robo-advisors to exploring the potential of real estate crowdfunding, modern investors are keen to branch out and discover creative but lucrative ways to turn money into more money. So, it's only natural to wonder whether a dividend reinvestment plan could be the right choice for you.

DRPs or DRIPs are plans that are offered by companies to their shareholders that enable them to reinvest their dividends automatically in more of the company's shares on the date that the dividend is paid. Typically these plans are commission-free, offering a discount on the share's current price. It sounds like an effortless way to make money, but if your investments are going to be as successful as those of the millionaire next door you'll need to know more about the types of DRIP out there and why they could be an advantageous investment option for you.

The Benefits Of Dividends

Savvy investors have long recognized the benefits of investing in stocks that pay impressive dividends. High dividend blue-chip stocks are always a popular choice among investors old and new as they represent an almost guaranteed way of making a profit year-on-year. There are even ETFs that focus specifically on these high dividend stocks that take all of the hard work out of investment.

Dividend Reinvestment Plans - Which Types Are There?

There are three types of DRP:

  1. Company-Operated DRIPs - these are operated by the company itself with an internal department handling the plan in its entirety.
  2. Third-Party Operated DRIPs - these are outsourced to a third-party company that handles the plan.
  3. Broker-Operated DRIPs - some brokers provide DRIPs even when the companies themselves don't. This type of DRIP allows brokers to buy shares on the open market.

Why Try A Dividend Reinvestment Plan?

There are three key advantages to a dividend reinvestment plan:

  • No commission is paid when buying shares through a DRIP, saving you money
  • You can accumulate discounted shares since DRIPs allow you to buy shares at lower cost
  • Cash dividends are automatically reinvested so you can achieve compounding return

What Should I Be Aware Of?

There are a couple of things you should be aware of when investing in DRIPs. Firstly, shares acquired in this way are taxable since they're considered as income. Therefore, you'll need to keep records for tax reporting purposes. This can be time-consuming and stressful for investors.

Another potential issue to bear in mind is that your exposure to one specific company will be increased by a DRIP The more shares you acquire in this way, the more heavily your portfolio is exposed to that company. You may, therefore, need to rebalance your portfolio periodically.

Are DRIPs For Me?

As you can see, there are some major advantages to investing in a Dividend Reinvestment Plan, but they certainly aren't suitable for everyone. While they will save you the time and hassle of deciding what to do with your paid dividends, you will need to remember to keep financial records and to keep on top of your balanced portfolio. Yet, with the right approach, you can make a healthy profit with DRIPs, taking advantage of the many benefits that this form of investment brings with it. At the end of the day, the choice is yours.

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