DRIP Investing Part 1: What is Dividend Reinvestment?

It seems like most things are automated nowadays. Our Hydro is automatically paid. Our car insurance can be pulled directly from our accounts. Even our paychecks are directly deposited into our banks rather than having a physical check you have to take into the bank. Automation doesn’t just stop here — it’s also a significant part of investing. One investment plan, in particular, takes automation to the next level. This plan is known as a DRIP.

What is DRIP Investing?

DRIP is short for Dividend Reinvestment Plan. Essentially, DRIP Investing involves reinvesting the cash dividends that investors receive from a stock or investment. Usually, investors receive dividends in the form of a cheque or direct deposit. A DRIP simplifies the process of reinvesting cash dividends directly into the purchase of more stock. 

Dividend reinvestment is a popular strategy for retirement planning and generating income. If a company or investment performs well enough to be offering cash dividends to investors, purchasing additional shares is an excellent idea and can lead to higher rewards in the future if the company continues to perform well.  

How to Start a Dividend Reinvestment Plan

There are numerous DRIP Investment options available. Look for companies and investment options that offer dividend payouts and have a good history of providing consistent payouts.

A DRIP Investment can be offered in a few ways:

• Company Operated DRIPs are dividend reinvestment options that the company itself operates. If you purchase stock directly from these companies, then a DRIP can also be set up if it’s offered.

• Third-party DRIPs are dividend reinvestment plans through third-party managed platforms, called transfer agents. There are usually fees involved in this method, but you can buy stock from multiple companies and better diversify your portfolio. 

• Brokerage DRIPs are dividend reinvestment plans offered by your brokerage facility. You just choose the stocks and funds and opt-in to the brokerage’s DRIP plan. Whenever there is a payout in your brokerage account, it’s automatically reinvested.
• DIY DRIPs are on the rise, just as DIY investing is. This method is excellent if there is no third-party, brokerage, or direct option to set up a DRIP. However, it’s not so much of an automated process and involves physically purchasing more shares with your cash dividends.

 

Now that you know what DRIP investing is and how to start a dividend reinvestment plan, you may be wondering if it’s even a good idea? We’ll be covering the benefits of DRIP investing in our next post. Can’t wait that long? Contact Jordan on our team to learn more.