Lux Investing
What is a DRIP Plan?
Okay I asked about stocks earlier and most of you told me to try a DRIP plan? What exactly is a DRIP plan? Will it be good for long term? Is there a lot of risk? I'm only 18 and I really want to get going on this whole investing ordeal! Please help! Thanks
Public Comments
- A plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.
- With a DRIP plan, instead of receiving your stock dividends, they are automatically invested in more stock. It's a painless way to invest, since you're investing money that never actually spends any time in your pocket. My husband and I have used DRIP for a number of stocks we own. The downside of DRIP is that it complicates your income taxes. When you sell a stock, you have to pay capital gains tax on the difference between what you paid for it and what you sell it for (hopefully, that difference will be a positive number--if not, then you have a capital loss instead of a capital gain). So, you have to add up those tiny little DRIP purchases to get your stock basis (what you paid for the stock). That is a major pain. DO NOT throw away any of the quarterly statements you receive that contain this information! Even if you pay someone else to figure out your taxes for you, they will need that information. Because of the income tax complications, we don't use DRIP anymore.
- A DRIP plan simply takes your dividend payments, and purchases more shares instead of sending you a check. This can be a good savings tool, as it allows you to build up your shares, and you get the advantage of dollar cost averaging. (You pay the average price throughout the month, which is a type of diversification in the eyes of some investors.) The advantage to DRIP plans are they often have no or very low fees and allow you to buy fractional shares. However, at 18 and with a strong interest in investing, you could probably look into actively managing your own portfolio. This is extremely easy to do with the likes of ETrade and Scottradeand all the other online brokers. Make sure you compare fees and minimum balances to find the right fit, and diversify yourself over a couple of researched stocks. Fool.com offers some really good information for beginning investors. If you only have a small amount to invest, a DRIP plan is a good way to get started. Some notable DRIPS include General Electric, McDonalds, and Coca-Cola.
- Check out; http://www.dripinvestor.com/index.asp (You don't have to buy this service...... I just give you the web site for more info. Carlson's books on DRIPs are the "Bible" of DRIP investing. Before you start any "plan" on investing, you need to learn about stocks. The "dummy" series has some good books. Learn about "asset allocation" before putting out 1 cent on any investment. Always have a exit plan.... before ou buy any stock. Congratulations on your interest. It will serve you well!
- Now that others explained DRIP, where to do it might be your question. From the website of the company whose stock you are interested in, you can find their stock agent, and that company may allow you to buy stock (for a low fee) and reinvest the dividends automatically (little or no fee). Although, fee for first stock purchase may be higher than additional purchases. Accounting for cost basis in a taxable account for fractional shares can be tedious and never ending (keeping good long records). DRIP is much easier in a tax deferred (IRA), or tax-free (Roth IRA) account. Then you do not need records of every dividend reinvestment and fractional share purchase. Check with discount brokers to find one with no annual or monthly account fee that will DRIP for free. I have the bulk of my IRA and Roth IRA at Fidelity, but qualify for lower than their initial stock trade fees.
- I have had a DRIP Plan for 22 years, and it is by far the best investment I have ever made. I like to recommend them to most people as an option. I left a source that will give you a better understanding.
