The drip investing strategy is an investing technique that involves buying stocks and reinvesting the dividends received back into the stock. This technique allows investors to gradually accumulate shares over time without having to make large upfront investment.
There are a number of advantages to drip investing, including the ability to compound returns and dollar-cost average into a position. However, one of the biggest drawbacks is that many brokerages charge fees for reinvesting dividends, which can eat into your overall returns.
Luckily, there are a handful of brokerages that offer dividend reinvestment plans (DRIPs) without any fees. In this article, we’ll take a look at the best DRIP stocks for 2022.
5 Things you should know about DRIP investing
1. What is DRIP investing?
DRIP investing stands for “dividend reinvestment plan.” It’s a strategy whereby investors automatically reinvest their dividends back into the stock, rather than taking the cash. This allows them to gradually accumulate more shares over time without having to make large upfront investment.
2. How does DRIP investing work?
There are two ways to set up a DRIP: through your broker or directly with the company. If you set up a DRIP through your broker, they will automatically reinvest your dividends back into the stock. If you set up a DRIP directly with the company, you’ll need to instruct them to reinvest your dividends.
Most companies that offer DRIPs will allow you to reinvest your dividends for free. However, some companies charge a fee for this service. Be sure to check with the company before enrolling in their DRIP.
3. What are the benefits of DRIP investing?
There are a number of advantages to DRIP investing, including the ability to compound returns and dollar-cost average into a position.
Compounding returns: One of the biggest advantages of DRIP investing is the ability to compound your returns. When you reinvest your dividends back into the stock, you’re essentially giving yourself a raise. That raise then compounds over time, resulting in exponential growth.
Dollar-cost averaging: Another advantage of DRIP investing is that it allows you to dollar-cost average into a position. When you reinvest your dividends back into the stock, you’re buying more shares when the price is low and fewer shares when the price is high. This technique can help to smooth out the ups and downs of the market and reduce your overall risk.
4. What are the risks of DRIP investing?
There are a few risks to be aware of before enrolling in a DRIP, including the potential for fees, taxes, and dilution.
Fees: Many brokerages charge fees for reinvesting dividends. These fees can eat into your overall returns, so be sure to check with your broker before enrolling in a DRIP.
Taxes: Another risk to be aware of is taxes. Dividends are taxable, so you’ll need to factor in the tax implications of reinvesting them back into the stock.
Dilution: Finally, one of the risks of DRIP investing is dilution. When a company reinvest your dividends back into the stock, it’s effectively issuing new shares. This can result in dilution for existing shareholders.
5. Who should consider DRIP investing?
DRIP investing is a strategy that can be used by investors of all experience levels. However, it’s important to keep in mind that there are risks involved. Be sure to do your research and consult with a financial advisor before enrolling in a DRIP.
Things you should never do in a DRIP
There are a few things you should never do when enrolling in a DRIP, including:
1. Enrolling in a DRIP without doing your research
2. Enrolling in a DRIP with a company that charges fees
3. Failing to factor in the tax implications of reinvesting your dividends
4. Enrolling in a DRIP without considering the risks
5. Enrolling in a DRIP without consulting with a financial advisor
The Bottom Line
DRIP investing is a strategy that can be used by investors of all experience levels to compound their returns and dollar-cost average into a position. However, there are a few risks to be aware of before enrolling in a DRIP, including fees, taxes, and dilution. Be sure to do your research and consult with a financial advisor before enrolling in a DRIP.
