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Friday, December 14, 2007

What is DRIP, and why is it key to successful dividend investing?

Several times throughout my blog I have referred to a DRIP. What, exactly, is a DRIP?

DRIP stands for dividend reinvestment program or dividend reinvestment plan. What is it? And why is it key to good dividend investing?

Dividend investing calls for us accumulating shares good, long-term, strong companies. And DRIP's assist us to do this. When it comes time for the dividend to be paid, the investor does not receive the dividend as cash. Instead, if the investor has enrolled in the DRIP, the investor's dividends are directly reinvested in the stock that issued the dividend. The biggest bonus to a DRIP, is that there are no broker commissions. So it allows you to accumulate more stock, without the negative price cost of a broker commission. It also allows us to accomplish one of our main goals of dividend investing. Accumulating shares of good stock. And you don't need to raise new cash to come up with the purchase. Not all companies that pay dividends participant in the DRIP program, and a few that do will charge you a small fee or proportional commissions. I usually check Dividend to check those facts on any stock I may think of purchasing. When purchasing plans, and using the whole dollar amount of the dividend you are paid, most plans allow fractional shares to 3 or 4 decimal places. So if you are paid $140.00 in dividends on a stock, the DRIP will allow you to reinvest for 3.0183 shares if the case warrants.
There is another benefit to the DRIP. It allows us to dollar-cost average in our accumulation of a particular stock. What does this mean? I'll discuss that in the next blog . . .

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