How Do You Invest In A DRIP?
Ok so your interested in DRIPs - sounds like it might be a cheaper way to buy investments. Here my advice on how to make them work for you.
What are DRIPs?
1) Don't invest in a DRIP; figure out what your investing in and then see if the DRIP is right for you
If your the type of investor who likes to buy an investment, add to that investment periodically or revinvest the dividends for a long period of time then a DRIP maybe for you. However, don't decide you want a DRIP and then try and figure out what publicly traded company offers a DRIP plan you can invest in.
Decide where you want to make an investment. If its a pubicly traded company, go to the company's website and look for info on Shareholder Services on their Investor Relations pages. If they offer a company-sponsored DRIP, they will provide information about it here.
2) How do I get the one share of stock that some company-sponsored DRIPs require?
Some company-sponsored DRIPs don't even allow you to make an initial purchase of stock from the plan. Look at the company-sponsored DRIP prospectus to see if it allows you to make an initial investment or requires 1 share to get started.
For those DRIPs that require 1 share, you have to get at least 1 share from somewhere else. If you don't already own the stock in certificate form or don't have a friend/relative that will "gift" you a share of stock then the DRIP probably doesn't make sense as a holding vehicle for you.
For instance, you could buy 1 share of stock through Sharebuilder for $4, but then it costs $30 to get the stock issued in certificate form and then you can open the company-sponsored DRIP. As a result you real cost just to open the DRIP is $34, probably more expensive than just holding your entire investment in Sharebuilder or other brokerage account.
I have had friends and family who already participate in a DRIP that I wanted to open. I had them "gift" me 2 shares of stock so that I have the shares to open the DRIP account, this work well as long as you can find someone who is willing to do this for you. It is a bit of effort for both you and the gifter.
3) Don't assume the company-sponsored DRIP is the best holding vehicle
There is lots of considerations such as how long you plan on holding the investment, how often do you plan to make investments, do you plan to reinvest dividends, etc. Look at various brokerage account (including Sharebuilder) to see if a brokerage account or the DRIP will likely provide you with the lowest total cost of ownership throughout the investment.
See this previous article comparing some DRIP plans to Sharebuilder for more info.
4) Signing up for the DRIP
Once you have decided the DRIP is the right holding vehicle for you the account is fairly easy to open. You usually can either request the paperwork needed, or fill out the forms on the DRIP administrators web site to open the account.
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