What Are Dividend Reinvestment Plans (DRIPs)?

Anyone who is interested in building a solid financial future needs to continually educate themselves about the various investment options that are available today. But learning about money market accounts, certificates of deposit, and stocks and bonds can be confusing, and keeping up with the latest financial news can be a time-consuming experience. However, it will be worth your time and effort when you begin to see returns on your financial investments.

One low-cost investing opportunity that is sometimes overlooked is a Dividend Reinvestment Plan, commonly referred to as a DRIP or DRP. Simply stated, it means that instead of receiving cash dividends, the company applies those dividends to the purchase of additional shares of stock with little or no commissions charged.

As you read the financial pages of the newspaper, you may be attracted by the many dividend-paying stocks that are featured. As you investigate further, however, you should look for companies that offer dividend reinvestment plans to their shareholders.

Over 1,000 companies now offer DRIPs to their shareholders. These plans are becoming very popular because they are perfect for investors who prefer long-term, "buy and hold" types of investments. When you find a company that you are interested in, read its plan prospectus carefully, and make sure that you understand all aspects of the DRIP before purchasing any shares of stock.

In most plans, however, you are still given the option of only reinvesting part of your dividends. Commonly referred to as a "partial reinvestment option," it allows you to split your dividend check between reinvesting and getting a cash payment.

The costs associated with DRIPs vary from company to company and usually come in two forms -- service charges and prorated brokerage commissions.

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