DRIPs,
or dividend reinvestment plans, are one of the easiest ways to
build your stock and mutual fund accounts over the long term.
That’s because DRIPs let you reinvest your earnings and take
advantage of compounding, which means your earnings are added
to your principal to create a new base, which may generate future
earnings. In a strong market, compounding produces what is sometimes
described as a snowball effect.
More than 1,000 U.S. corporations offer DRIPs,
and you can participate even if your shares are registered in
street
name,
which means they’re held by your broker in
the firm’s name.
When you enroll in a DRIP, any dividends
the company pays you are reinvested directly in new shares of
stock. If there’s not enough cash to buy a full share, the
money accumulates in your account until future dividends are paid.
Most DRIPs also let you make additional investments on a regular
schedule.
One drawback of using a DRIP is that each
purchase is a separate transaction, which can complicate figuring
your capital gains or losses when you sell your shares.
