DRiP Primer

Who Should Consider Investing with DRiPs?

While Dividend Reinvestment Plans (DRiPs) offer several advantages to investors, they are not for everyone. You should consider your own investment goals and be sure that DRiPs are the appropriate investing vehicle to help you reach those goals before you begin. So, who should consider investing with DRiPs?

1. Long-term Investors: Rather than being a “get rich quick scheme”, DRiPs have been referred to by some as “get rich eventually schemes.” To take full advantage of all of the benefits that dividend reinvestment plans offer, an investor considering DRiPs should have a long-term investment horizon. With DRiPs, you will build your investment portfolio slowly, over time, by reinvesting your dividends into additional shares of stock, as well as by making additional share purchases through dollar cost averaging. While there is no specific definition for a “long-term” investor, the longer you have to invest the better.

   Why are DRiPs better suited for long-term investors? DRiPs are optimized to benefit from the power of compounding returns. Compounding returns are a very powerful weapon for investors, but they are most effective over long time horizons. Consider the following two investors. Investor A invests $1,000 in the stock market at age 20 and Investor B invests $1,000 in the stock market at age 30. Assuming a 6% return, by the time Investor A reaches age 65, her $1,000 investment will be worth $14,900. By the time Investor B reaches age 65, here $1,000 investment will be worth $8,178. The longer the investment horizon the more an investor will benefit from the power of compounding.

2. Time-Crunched Investors: DRiPs are also likely to be of interest to those who want to invest, but don’t have hours and hours each week to follow their investments. Please don’t get us wrong, you should always follow your investment portfolio to be sure that your strategy remains intact and that the companies in which you’ve chosen to invest are performing to your expectations. However, not everyone is a day trader and not everyone has the time, or the inclination, to spend hours poring over investment research each week. For those investors, DRiPs may be worth further research.

   With DRiPs, you can essentially automate your investing process. Once you have enrolled in the DRiP of your selected companies, you can choose to invest certain amounts of money at selected intervals and, in most cases, have the funds automatically deducted from your bank account. The company’s transfer agent will handle the purchases and the reinvestment of dividends and you will slowly build your portfolio with minimal time dedicated to the investment process.

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