7 reasons why you should use Dividend Reinvestment Plans

Stock investors who are looking to build wealth over the long term, should consider Dividend Reinvestment Plans. There aren't many investment programs that have this many benefits. A DRIP is a type of direct investment plan (DIP). Instead of buying shares on the stock market, and paying brokerage fees for every transaction, investors can purchase shares directly from the company on a regular basis. Instead of receiving a cheque for a company's dividends, they are automatically use to purchase additional shares at the current market price. Many plans also allow traders to buy shares outside this time, as a one-time purchase, or on a regular basis.

Just because a company offers DRIPS, doesn't mean investors should jump at the opportunity. The company's fundamentals should be strong, and contain reasons for buying even without the DRIP offers.

Low Budget Constraints

DRIPs are great for new investors who are starting out their share portfolio with only a small amount of capital. With a minimal amount of money, investors can purchase stocks in small quantities with low, or even no fees at all.

Investment at Your Own Pace

DRIPs usually require a minimum amount of capital to participate in the plan. However, investors usually have the luxury of investing at their own pace. Not only are the dividends reinvested through additional shares, but also offer the ability to buy shares via the plan with low, or no commissions. So when you manage to get some extra money to invest, you can.

Paying Less Commissions

When you purchase shares directly from a company, you are bypassing the middleman: the broker. Without the broker, there are no brokerage fees. These transactional costs can add up, and is devastating for someone with small amounts of funds. The less money you have to pay a broker, the more money you have for investing.

Removes Emotion From Stock Investing

Stock trading, as with any venture that involves capital and risk, can get emotional. When you see your profits increase, your hopes, greed, and happiness increase with them. When you see your losses pile up, your fear can become overwhelming. DRIPs help reduce this emotional roller coaster, as you have already made the decision to commit to reinvest on a regular schedule. The performance of the market doesn't come into the picture. Your wealth will slowly build up over time without the need for your emotional involvement.

Compounded Growth

With DRIPs, you won't receive the cheque to tempt you to go on another spending spree. It is automatically taken care of for you. Every cent is reinvested to compound your wealth for you. The additional shares purchased through DRIPs also produce dividends. The cycle of wealth building continues to your benefit.

Fractional Ownership

When you buy stocks through your broker, you can't buy part of a share. You have to buy a whole share. With most DRIPs, the reinvested dividends can be used to purchase parts of a share. This ensures that even if the dividend amount doesn't cover a whole share, you are not missing out. You are still entitled to your part of the dividend the part share produces.

Dollar Cost Averaging

The dollar cost averaging strategy refers to investing a fixed, or semi-fixed amount of money over time, regardless of price. You can end up reinvesting when the stock price is high, low, or in the middle. In the end, the stock price purchased is "averaged" out. You don't have to do anything once you've got the DRIP set up. Your dividends, and hopefully your wealth will be built up slowly over time, on a regular basis, independent of the stock price movements.

DRIPs can be a great method for building wealth over the long term. Dividend investors should consider both the Pros and Cons of dividend reinvestment plans before they decide to participate.