Dividend reinvestment plan -DRIP explained

ByWealth Diagram

Hi, we are going to explain what are dividend reinvestment plan aka drip, what are the pros and cons of investing on them.

Drip means Dividend reinvestment plan, it is a feature on the brokerage account or on the platform that you use to invest. This feature allow you to reinvest the cashflow you get automatically back into buying more share of the same stock.

Usually, you can get dividends monthly, quarterly or yearly.

For example, if you were to get a monthly dividend of $50 on an investment you own. If drip is allow on the investment and the drip feature is on. Then that $50 will automatedly be use to buy or get more share of the same stock.

Whole Shares!

If the company share cost $50 per shares then you automatically buy/get 1 share. why 50/50 =1

If the company share cost $10 per shares then you automatically buy/get 5 shares. why 50/10 = 5

If the company share cost $14 per shares then you automatically buy/get 3 shares. why 50/14 = 3.57 , so you get 3 shares and the remining 0.57 you get it as cash. The reason is you can only buy whole shares in most platform.

What about Fractional shares?

There are platform that allow you to buy fractional shares. Fractional shares are partial shares of a company’s stock. So instead of buying 1 whole share you can actually own a portion of one share or a fraction of one share.

So using one of the same example as before with drip. If you were to get a monthly dividend of $50 on an investment you own.

If the company share cost $14 per shares then you automatically buy/get 3.57 shares. why 50/14 = 3.57. and there is no cash left over because you can buy fractional share.

How can you activate the Drip?

If the drip feature is offer or available on the platform or brokerage account. You can activate the drip feature yourself or by contacting the platform or brokerage you are using.

Pros and cons of drips are depending what platform or brokerage you have and whether there are whole or fractional share. Some charge trading fees and other don’t charge trading fees and so on.

Cons

  • no compound effect on the left over cash.
  • If you are not reinvesting yourself, you won’t be able to invest it on something else. Usually is better to buy low and sell high, So you can buy more share.
  • Every time you trade there is fee, and they add up, eating at your earnings.
  • passive investing may make you lazy. No active investment, active investment force you to learn.

Pros

  • Compounding effect, you get interest on interesting etc.
  • Completely passive, set it up and the drip do the rest.
  • No Brokerage trading fees.
  • passive investing allow you to spend time on something else instead.

Things to know:

the pros and cons apply mostly to companies that only have whole shares. With fractional shares company is a different story. When price are too high, fractional share allow the small investor to be able to invest.

Now, go and adjust as you go.

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