2 of 7

Write now Article Tools

We've all heard about the miracles of compounding interest. Now imagine having a savings account in which, not only does your interest compound on a monthly basis (and then becomes part of the principal for the next month) - but the interest rate itself increases every six months!

This is very close to what you get with some Dividend Re-Investment Plans ("Drips," for short).

These plans are not offered by banks, but by corporations. If you start a DRIP you will be investing in the stock market. But before you get excited about buying shares of your favourite company, here's five things you must check on first:

1. Not every company pays a dividend. If it doesn't pay a dividend, it won't have a DRIP. Make sure the company you're interested in pays dividends. But...

2. Not every dividend-paying company offers a DRIP (check the "Investor Relations" section of their website). And...

3. Not every company that does offer to reinvest your dividends will also allow you to make optional, direct stock purchases along the way. SPP's (stock purchase plans) or OCP's (optional cash payments) are the same thing and just mean that you can also buy more shares directly from time to time - with no obligation, of course. You want a DRIP plan that has both the reinvestment part AND the optional stock purchase part.

4. Some companies will charge fees for reinvestment, SPP, or both. You want a DRIP plan that is completely free. Many are.

5. Many companies with DRIPs require certain minimum levels in order to make an optional purchase. Some have no minimums, while many are between $50-$100. If you're on a low income or just don't have much extra cash for investing right now, you want to go with the no-minimum OCPs. Remember, these are optional payments to make. But when you do make one, you might need to buy at least $50 worth of the company's shares.

Those are some of the basics, but here are a few more points about using these as part of a bigger-picture investing strategy.

* DRIPs work best as part of a buy-and-hold strategy. These aren't for investors who might need the money in the short-medium term or who are too impatient to allow the dividend reinvesting process to occur.

* Choose companies that regularly INCREASE their dividends. This is what will accelerate the growth of your portfolio. Banks and some utility companies, for example, might even increase their dividends twice a year.

* STOCK SPLITS might also occur from time to time. These are great for you. It means you have more opportunity for earnings growth. Usually these occur automatically and will be updated to your account electronically. You won't have to do anything.

How to Get Started:

Buy direct or buy one share and then sign up. Check out services like MoneyPaper. There are also a few great books on DRIPs available at Amazon. With some companies, you can just buy direct from their website. With others, you'll need to order one share first from a brokerage account. Then you need to get it "certificated" or "registered" in your own name.

I've been dripping for years now.

It's the best way for students and others on low or sporadic income to get into investing.

Do your research - DRIPs are a lot of fun to learn about, and they really pay off!

Learn more about this author, Clare Kierans.
Click here to send this author comments or questions.

Add your voice

Know something about Dividend Re-Investment Plan (DRIP): Recycle your way to wealth?
We want to hear your view. Write now!