Dividends - Part 5 – DRIP Accounts

DRIP Accounts – Dividend ReInvestment Accounts – are managed by a number of service providers for the benefit of companies that want a more stable shareholder base.

Many companies also want to provide their employees the opportunity to buy company stock using payroll deductions. Typically these ESPP (Employee Stock Purchase Plans) are DRIP accounts managed by the same group of DRIP account service providers.

My employer’s ESPP is managed by ComputerServe. In addition to my ESPP I also have a personal DRIP account at ComputerServe.

The typical features of a DRIP account are:
Very low transaction costs for buying shares
Provision for making small dollar purchases of fractional shares
Provision for making periodic – usually monthly – purchases
Provision to automatically reinvest quarterly dividends in fractional shares of the company’s stock

So, DRIP accounts provide a way for an individual to invest in a single company’s common stock with small but regular purchases and very low transaction fees. Reinvesting dividends provides yield compounding.

There are other DRIP provider’s besides ComputerServe. Another that I’ve dealt with is Bank of New York – Mellon.

Setting up DRIP accounts can be tedious but once set up they are easy to manage.

Many brokerage houses now offer free dividend reinvestment if you ask, but you do have to buy the shares and pay a commission as usual. I’m doing this through USAA Investment Bank in an account I’m managing for my wife.

Another thought on DRIP accounts; I have adult children for whom buying Christmas & birthday gifts was becoming difficult. Plus, they were not saving any money and had little or no understanding of investing.

So, I set up DRIP accounts for each of them. I make contributions to their accounts instead of buying gifts and, so they can watch the accounts grow, I send them the statements twice a year instead. This may be too impersonal for some folks but I believe it to be the best gift I could give them. They are seeing the advantages of saving & investing and learning something about it too.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts