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Investment Strategies
Categories
- Value Investing
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Growth Investing
|- Income Investing
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Market Capitalization
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Momentum Investing
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Technical Investing
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Buy and Hold Strategy
- Buy What You Know
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Contrarian Investing
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Turnaround Investing
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Tobin’s Q
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Responsible Investing
- ADR's
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Global Investing
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The Dow Theory
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Odd-Lot Theory
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Election Cycle Theory
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Dow Dividend Theory
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Penny Stocks
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Initial Public Offerings
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Dollar Cost Averaging
- Drips
- Risk Tolerance
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DRIP's
Dividend reinvestment plans or direct reinvestment
plans (“DRIPs”) are an excellent way to start investing in the stock market,
to save for retirement or for college costs, or to build a stock portfolio
with a minimum start-up investment. One makes a small initial investment and
then additional purchases at optional regular intervals, with dividends
being reinvested into the common stock of the company selected. It’s an easy
way to enjoy the benefits of both the time value of money concept and dollar
cost averaging. There are both company sponsored plans and broker sponsored
plans. I would use only company sponsored plans, to eliminate the broker’s
commission.
These programs require a small initial investment,
usually $250 to $500, or company shares in the form of a stock certificate.
Some plans offer a smaller initial investment, but require automatic
withdrawals from your checking account for approximately ten months. Then,
on a regular basis or periodically thereafter, you can invest in more
shares, usually for a minimum amount that ranges from $50 to $100. Dividends
can also be reinvested into whole or partial shares. Most plans require that
you pay commissions when you sell.
DRIPs benefit both the companies and the investors.
The companies get a broader investor base, who are usually loyal purchasers
of their products. Some companies also use these plans as an opportunity to
raise additional capital. The investors benefit because they can build
equity positions with small cash outflows. They also benefit from the
compounding of dividends and the use of dollar cost averaging. Some
companies offer a small discount on purchases, and many companies pay for
the administration costs of these plans. Costs are kept reasonable, but you
should comparison shop. Most companies make it easy for investors by having
automatic monthly purchases taken directly from the investors’ checking
accounts. Many people also use DRIPs to give a gift to a minor. It’s a “win
win” situation for all parties.
Stock selection and timing are the most important
factors in a DRIP investment strategy. Companies that fit the buy and hold
strategy, as well as dividend paying securities, are ideal for DRIP
investing. These plans are best suited for strong companies in basic
industries that can stand the test of time. More and more companies and
retail brokers are offering these plans, enabling investors to pick from a
broad array of companies in different industries.
DRIPs also make a very nice gift to minors. This is a
great opportunity for kids to learn about investing. Start them out with the
classic buy and hold type companies in time tested industries like energy,
defense, industrial gases, food, water and utilities. If the family holds
onto the securities, the minors may read the annual reports over the years.
Hopefully, this will facilitate the learning process, and be valuable when
they become an adults and have their own money to invest.
Investing in DRIPs is time consuming. First, you need
to select the company. Then, you need to obtain and complete an application
form. Many companies require you to be an existing shareholder; in that
case, you need a stock certificate in your name. You would purchase the
original share(s) from a broker; when the certificate is received, you would
forward it with the application to the company to start your account. While
the process can be time consuming up-front, the benefits can last for years
in the form of valuable assets.
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