What is DRIP Stock?

A drip stock is known as A dividend reinvestment plan, an investment program that allows investors to reinvest cash dividends into additional shares or fractional shares of the primary stock on the dividend payment date.  Basically,  Dividends are payments made by publicly traded companies to shareholders who own those companies’ stocks. The payments come in the form of either more shares of stocks or cash payments, and distributions are usually made on a monthly basis.

DRIP not only allows you to participate in a company’s growth on a regular basis, it also takes advantage of dollar-cost averaging (DCA) technique that averages out the price at which you buy stocks as they move up or down.

Over time, dividend reinvestment can help you compound your gains by buying more stock and reducing your risk through dollar-cost averaging.

For example, according to Dividend.com, an initial $2,000 investment in Pepsi in 1980 would have started an investor with 80 shares. By using dividend reinvestment, those shares would have numbered an astonishing 2,800 in 2004, worth more than $150,000.

But keep in mind that DRIPs have pros and cons, and different fee structures are depending on the company. So, be sure to research before you start.

Benefits of DRIP investing

 Does the stock market leave you feeling helpless? DRIP investing could be your solution. DRIP, or Dividend Reinvestment Plan, is where the dividends you receive from owning stocks are automatically reinvested into more shares of the same company.

Sam Stovall, chief investment strategist at CFRA Research, spoke to CNBC about the benefits of investing in dividend stocks during inflationary periods. He mentioned that dividend stocks ‘reduce the overall volatility’. He also asserted that reinvested dividends contributed 33% of the total return of the S&P 500 since 1945.

Various reports have revealed the importance of reinvested dividends in overall market returns. According to Schroders, the average annual growth across eight markets without dividend reinvestment was 4.3% from 1993 to 2018 and jumped to 7.1% when reinvested dividends were included.

The report also mentioned that the S&P 500 returned 7.5% during the same periods without dividends, with dividend reinvestments taking the total return to 9.7%. Another study done by Professor Elroy at London Business School for the Credit Suisse Yearbook 2011 mentioned that investments made from 1900 to 2010 would have generated an annualized return of 5%. However, the total return would have jumped to 9.4% with reinvested dividends.

This not only helps accumulate shares over time but also avoids commission fees. The benefits are obvious: it’s a great way to grow your wealth without having to monitor the stock market all the time.

So, how do you start DRIP investing? It’s easy! The first step is to find dividend-paying stocks you want to invest in and then find a brokerage that offers DRIP plans to open an account. Then, sit back, relax, and watch your investment grow while listening to your favorite hip-hop tracks.

Top DRIP stocks to invest in

Is DRIP stock a wise investment choice? It depends on your goals. Renowned companies, such as Starbucks, Microsoft, and Procter & Gamble, offer DRIP plans, which have historically proved to be prosperous. According to Yahoo Finance the Best DRIP stocks to invest in are as follows:

1. Emerson Electric Co. (NYSE:EMR) , which may  Yield  Dividend as of January 16: 2.12%

Risks of DRIP investing

Investing in DRIP  (Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2x Shares) or any other leveraged or inverse exchange-traded fund (ETF) comes with certain risks that you should be aware of before making an investment. Here are some key risks associated with DRIP investing:

Concentration risk: By reinvesting dividends in the same company, DRIP investors may become overly concentrated in a single stock. If the company experiences financial difficulties or a decline in its stock price, the investor’s portfolio could suffer significant losses. Diversification across different stocks and sectors can help mitigate this risk.

Lack of flexibility: DRIP investing typically requires a long-term commitment, as dividends are automatically reinvested. This lack of flexibility can limit an investor’s ability to respond to changes in their investment goals or market conditions. Selling shares to meet specific financial needs may be more challenging, as the investor may need to sell whole shares, potentially resulting in higher transaction costs.

Limited cash flow: By reinvesting dividends, DRIP investors forgo the opportunity to receive cash payments. This can be a disadvantage if investors rely on dividend income for living expenses or prefer to have the flexibility to allocate the cash elsewhere. It’s important to consider your cash flow needs and determine whether the reinvestment of dividends aligns with your financial goals.

Potential tax implications: Although dividends reinvested through DRIP are generally not taxed when received, investors may still have tax obligations when they eventually sell the shares. The cost basis of the reinvested shares may be challenging to track, which could lead to higher tax liabilities or complexities when calculating capital gains or losses.

Limited control over timing and price: With DRIP investing, investors have little control over the timing and price at which their dividends are reinvested. This lack of control means that investors may buy additional shares at unfavorable prices, especially during periods of market volatility or when the stock is overvalued.

Company-specific risks: DRIP investors are exposed to the risks associated with the specific company they are reinvesting dividends into. These risks can include factors such as competition, regulatory changes, economic conditions, and company-specific events. Conducting thorough research on the company’s financial health, growth prospects, and industry dynamics is crucial to assess these risks effectively.

It’s important to note that the risks associated with DRIP investing can vary depending on the individual investor’s goals, time horizon, and risk tolerance. It’s advisable to consult with a financial advisor who can provide personalized guidance based on your specific circumstances and help you evaluate the suitability of DRIP investing within your overall investment strategy.

It’s crucial to thoroughly understand these risks and carefully consider your investment goals, risk tolerance, and time horizon before investing in DRIP or any leverage or inverse ETF. It’s recommended to consult with a financial advisor or do extensive research to ensure that DRIP aligns with your investment strategy and risk profile.

How to buy drip stock

To buy DRIP stock, you need to follow these general steps:

1.Choose a brokerage: Select a reputable online brokerage that provides access to the stock market. Some popular options include Robinhood, E-Trade, TD Ameritrade, Fidelity, and Charles Schwab. Compare their fees, features, and user reviews to find one that suits your needs.

2.Open a brokerage account: Visit the website of your chosen brokerage and follow their instructions to open a new account. You will typically need to provide personal information and complete a verification process.

3.Deposit funds: Once your account is set up and verified, deposit funds into your brokerage account. You can usually do this through a bank transfer or by linking your bank account to the brokerage account.

4.Research DRIP stock: Before making any investment, it’s essential to research the stock you’re interested in. Review the company’s financials, news, recent performance, and any other relevant information. Determine whether DRIP (which stands for Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares) aligns with your investment goals and risk tolerance.

5.Place an order: Log in to your brokerage account and navigate to the order placement section. Specify the number of shares of DRIP you want to buy and the type of order (market order, limit order, etc.). A market order will execute at the prevailing market price, while a limit order allows you to set a specific price at which you are willing to buy.

6.Review and confirm: Double-check all the details of your order, including the quantity and price, to ensure accuracy. Confirm the order to submit it for execution.

7.Monitor your investment: After your order is executed, you will become a shareholder of DRIP. Keep track of the stock’s performance and regularly review your investment portfolio.

It’s important to note that the process of buying stocks may vary slightly depending on the brokerage platform you use. The steps outlined above provide a general overview, but it’s recommended to consult your chosen brokerage’s resources and customer support for specific instructions related to their platform.

 Long-term benefits of DRIP investing

DRIP (Dividend Reinvestment Plan) investing can provide several long-term benefits for investors. Here are some of the key advantages:

1.Compound Growth: DRIP allows you to reinvest your dividends automatically to purchase additional shares of the dividend-paying stock. Over time, this reinvestment can lead to the compounding effect, where your investment grows exponentially. The more shares you own, the more dividends you receive, leading to further reinvestment and growth.

2.Dollar-Cost Averaging: DRIPs enable investors to practice dollar-cost averaging. With this approach, you invest a fixed amount regularly, regardless of the stock’s price. When the stock price is high, your fixed investment buys fewer shares, and when the price is low, your fixed investment buys more shares. This strategy can help reduce the impact of short-term market fluctuations and potentially lower the average cost per share over time.

3.Increased Portfolio Diversification: Reinvesting dividends through DRIPs allows you to gradually increase your holdings in a specific company. However, it’s essential to diversify your investment portfolio to manage risk effectively. DRIPs can help in this regard by allowing you to reinvest dividends across different dividend-paying stocks, sectors, or even asset classes. This diversification can provide a more balanced and resilient investment portfolio.

4.Cost Efficiency: DRIP investing can be a cost-effective way to grow your investments. Many companies offer DRIPs without charging any commissions or fees for dividend reinvestment. This can save you money compared to purchasing additional shares through a broker and paying associated transaction fees.

5.Long-Term Focus: DRIP investing encourages a long-term perspective. By automatically reinvesting dividends, you are more likely to stay invested in the stock for the long haul, allowing you to benefit from the compounding effect and potentially ride out short-term market volatility. It promotes a disciplined approach to investing and discourages emotional decision-making based on short-term market movements.

6.Passive Income Stream: As you accumulate shares through dividend reinvestment, your portfolio can generate a stream of passive income. Over time, the dividend income from your investments can supplement your regular income, provide financial stability, or even be reinvested for further growth.

7.Tax Advantages: DRIP investing can have potential tax advantages, depending on the jurisdiction and specific tax regulations. In some cases, reinvested dividends may be subject to tax deferral until you sell the shares, allowing you to defer the tax liability to a later date.

It’s important to note that while DRIP investing has its benefits, it’s crucial to consider individual circumstances, risk tolerance, and investment goals before deciding to invest in a specific DRIP. Consulting with a financial advisor or doing thorough research can help you make informed investment decisions.