DRIP: Recognizing the Pros and Cons
In volatile markets, it is easy to lose your momentum to your investment goals. One tool that can help you stay the course is a dividend reinvestment plan, also referred to as a DRIP. This tool is an important portion of any dividend investor’s portfolio. Setting up a DRIP provides a way for investors to gradually grow their money. It allows them to put the income they receive from stock dividends back into their investment, buying more full shares or fractional shares, instead of receiving the dividend amount in cash. It can help them to reinvest their dividend dollars and to increase their investment in the stock market.
However, as with most things in the world of investing, DRIPs have some potential negatives – or at least some factors you should take into consideration that offset the many things that make DRIP a good investment.
This article will tell you the potential positive and negative sides of DRIP to your financial career.
1. Grows Shares
With DRIPS, investors can increase the number of shares they have incrementally, allowing them to own full or fractional shares (as mentioned above). These shares cannot be purchased outright in the open market, which is an advantage in itself. This is because investors can put all their money to work, instead of leaving the cash sitting around in their accounts.
2. No Lower Limit
There is no lower limit for DRIP. It doesn’t matter if it was offered by the company itself or the broker. Investors can own as little as one share, and still be qualified for the program. This gives all investors, including those with relatively less money to invest in stocks, to be able to benefit from the program all the same.
3. No Commissions
Using dividend reinvestment is also very cost efficient. Most brokers and companies now offer DRIP for absolutely no cost, which means that one can buy new shares in companies without any commissions.
1. No Income Stream
This is a big disadvantage of DRIP investing, especially for retirees in the ‘distribution stage’ of their lives. Although DRIP investing allows investors to grow the shares they have over time, this means that they sacrifice receiving their dividends. For retirees depending on their dividends to sustain their day-to-day expenses, using the DRIP will not be possible. For younger investors, it may also be a negative point, since it removes this stream of passive income.See also Investment Choices Suitable for Retirees
2. No Control on Valuation and Timing
Some of the factors most investors take into consideration when buying shares include the trend of the stock price and the valuation of the earnings, or only when the stock price’s trend is in our favor. When using a DRIP program, investors have absolutely no control over when they want to buy shares, since shares are automatically purchased when the dividend arrives. Hence, investors might buy shares at valuations that are unacceptable to them.
3. No Diversification
When an investor uses the DRIP program, dividends are consistently reinvested into the company that paid the dividend. This means that there are no new funds for the investor to purchase new companies and diversify his portfolio. This might also cause some companies and sectors to be over-weighted within the portfolio, amplifying the bad impact of a price decline in the specific company or sector.See also Importance of Diversification
You must be armed to the teeth with the best and most useful knowledge in trading. Visit Bworld Review to turn yourself into a sharper and wiser investor! Register an account now with BWorld and start your investment journey.