Many stocks offer a dividend as part of owning the stock. The dividend is nothing more than an amount per share that is paid to the stock holder either quarterly or yearly. Dividends are a great way to earn a little extra cash while holding an investment you’re thinking will grow and are a fundamental tool for anyone’s stock market 101 plan. The problem is for new or small investors it’s hard to figure out what to do with those small dividend checks. If you own $1000 in a stock that pays a 2% annual dividend you will get a check for $20. It can be difficult to reinvest $20 into something meaningful so you have to wait until you get more money in your account or you sell another stock before you have enough money to reinvest into your new stock without having commissions eat your entire dividend.
Thus, the creation of the DRIP or Dividend ReInvestment Plan. Essentially, if you sign up for a DRIP with a company that you would like to own for the long term every time they cut you a dividend they will send you the money in shares of company stock instead of money. These shares are often commission free (if they are not don’t bother with the drip) and they usually round up on the number of shares so you even get a deal on that last share. This is a great way to compound your shares on a company you love being the owner in without keeping track of the nickels and dimes coming into your account.
Any DRIP shouldn’t cost money to sign up for or carry any significant commission per share. The reason is the company is the one saving money by offering you shares and encouraging a higher level of ownership which keeps their price per share higher. If the DRIP is setup that they are the main benefactor from it than you should just hold onto your money and reinvest the traditional way. However, most companies now realize they shouldn’t nickel and dime you and DRIPs can be a great way for those who are just beginning to learn the stock market to buy extra shares now and increase your percent invested.