Q

What's dividend reinvestment?

A

It's an option available to people invested in companies with stock that yields dividends, which are a portion of a company’s profits that are regularly passed along to investors.

DRIP isn’t exactly the greatest acronym, but it stands for something important. A dividend reinvestment program (DRIP) is an option available to people invested in companies with stock that yields dividends, which are a portion of a company’s profits that are regularly passed along to investors.

With a DRIP, rather than these dividends being paid to the investor in cash, the company will instead issue dividends in the form of more company stock. Both investors and companies tend to adore DRIPs — investors, because they’re an easy way of acquiring stock without having to pay any broker’s fees (and DRIPs also spare you the temptation of blowing your dividends on sneakers and tasting menus) Companies like offering DRIPs because they can disperse dividends without having to actually use cash, and because of that, many companies will offer stock at a discounted rate to those enrolled in DRIPs.

Though DRIPs generally tend to be administered by the companies themselves, brokerages may also offer DRIP plans at no additional cost to you. One of the big upsides of a DRIP is that this regular investment in a particular stock assures you’ll be benefiting from dollar cost averaging, meaning that because you’re regularly investing — quarterly, in most cases — and because stocks rise and fall, you’ll avoid buying a stock at its highest price.

The downsides of DRIPs are few, but include small inconveniences. In order to register for company DRIPs, you’ll need to get an actual, old-school stock certificate from the company to apply — and you’ll need to hold onto that certificate as proof of your share ownership. And when you sell the stock, figuring out tax liability can be a bit of a headache, since you’ll be selling stock that you bought at lots of different prices, and each price point will mean a different amount of capital gains. At a time like that, a good accountant will save your bacon.

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