DRIP Stock Investing: How to Collect More Stock on Autopilot

DRIP is an acronym for Dividend Reinvestment Plan. It is an arrangement where dividends are automatically reinvested into more shares. Thus, a DRIP plan makes it easier and, at times, cheaper to reinvest dividends.

What is DRIP Stock Investing? When you buy dividend stocks, companies pay you periodically for holding their shares. A dividend is a way for the company to say thank you for investing in us, and dividends mostly come from the company’s profits in the previous year.

How Does DRIP Stock Investing Work?

A dividend is a return to shareholders on their investment. It’s usually in the form of cash payment that can be paid through check or deposited directly to the shareholder’s account. A DRIP plan offers investors an opportunity to reinvest their cash dividend and purchase the company shares.

Here are the benefits of dividend reinvestment plans.

Dollar-cost averaging. When you reinvest your dividends, what you are essentially doing is dollar-cost averaging. Dollar-cost averaging is a recurring purchase of an investment instead of investing once in a lump sum.

Immediate reinvestment. Since dividends get automatically reinvested into buying more shares, DRIP can minimize the chances of leaving your cash lying idle as you don’t have to do it manually. Lower commissions. If you join a DRIP program through a brokerage firm, the brokerage firm may not charge a commission on the reinvested dividends.

Here are the drawbacks of DRIP investing: – Taxation. Dividends are considered taxable income. Even if you reinvest your dividends before they hit your bank account, they will still be reported to the IRS as income.

Non-diversification. After setting up a DRIP plan for a single stock, you may end up accumulating a considerable amount of that stock over time. As a result, it prevents you from diversifying and can put you at bigger risk.

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