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Dividend Reinvestment Plans: Investing on Automatic Pilot

Posted on May 25, 2020 by Todd Marvel

If you are like many investors who waste those small dividend checks from your stock portfolio, a Dividend Reinvestment Plan (DRP) might be exactly what you require. Just as its name suggests, a Dividend Reinvestment Plan lets you reinvest some or all those dividends into more stock of the issuing firm. Unlike purchases made through conventional means, partial or fractional shares, in addition to whole shares, can be found.

Technically, there are two kinds of DRPs. The first type involves purchasing shares in the marketplace through an outside trustee. Even though the corporation might subsidize the trade costs, buying shares at a discount isn't allowed.

The second type lets you purchase directly from the issuing firm, which might offer a discount from the market price. This is a distinct advantage over purchasing from an outside trustee.

Aside from giving dividends a much better purpose than sitting in your pocket or in a brokerage money account, a DRP may provide other advantages also. By purchasing on a regular basis, you are"dollar cost averaging" your purchases, an investment plan designed to decrease volatility. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in the purchase price. Of course you should think about your ability to continue buying through periods of low price levels. This sort of plan doesn't guarantee a profit or protect against loss.

Second, many companies offer additional options with their DRPs, such as buying stock at low minimums and sometimes even offering shares at a discount (often 3-5%) off current market rates.

From a tax standpoint, you're subject to income taxes on the value of the volatility whether you reinvest them or not. Your tax basis for all your stocks including the reinvested dividends is the amount paid for the initial shares in addition to the dividends, minus the expenses deducted from the dividends as a service fee as part of the DRP.

Keeping good records is a must, especially if you intend to keep on engaging in a DRP over numerous years. Without the documents, it might become very tricky to track all of your purchases. Just a little bit of work can save you big headaches in the future.

Typically, you will be given a quarterly statement outlining your DRP account. Among other items, these quarterly statements will detail your continuing investments, how many shares are held by the program, how many shares are held be you, and the value of your shares.

Not many companies provide DRP's but, to get a listing of one's that do, there are lots of web sites dedicated to those programs. These sites not only have a complete list of businesses with DRPs, they also offers online registration services. For securities held in a broker or wrap accounts, check with your brokerage firm to find out whether they have the capacity to enroll you. If all else fails, try either the company itself or its transfer agent.

Even though it's easy to see the benefits of DRP programs to the investor, we shouldn't overlook the advantages to the issuing firm. Apart from helping to stabilize market prices, a DRP is a fairly effective way to raise funds and, because firms only"guarantee" to keep these programs in the long run, the issuing firm controls when and how much funds will be raised.

More than 1,000 companies currently offer some sort of Dividend Reinvestment Plan and, with some research, you need to be able to get on the route of"automatic pilot" investing for your long run.