What are DRIPs (Dividend Reinvestiment Plans)?

DRIP (or DRP) is an abbreviation for Dividend ReInvestment Plans. DRIP is an investment plan that allow us to reinvest dividends (to use dividends to buy more stocks) without paying brokerage commissions. Some DRIPs allow purchasing additional stocks, also without paying brokerage commissions. Usually (but not always) DRIPs don't charge commissions. On the other hand the company might give you a discount of 3-5%. To sign in to the DRIP you should already have at least one share of the company on your name. Some companies request owning a minimal number of shares in order to sign in to their DRIP (for example HP). Therefore, you must use a broker to buy the first shares, or buy them directly from the company. Note that not all companies allow direct purchasing. Usually a company that allows direct purchase allows DRIP.


DRIP doesn't necessarily mean that you can purchase shares directly. So what is the point if you have to go to the broker anyway? The benefit is in the possibility to invest and reinvest small amount of money and in the fact that you will avoid the brokerage fees on subsequent buying. For example, if you have a share that earns 3% dividends, and you have shares worth $100, then you will receive $3 dividends. The company will send you a check but you will not be able to reinvest it (due to commissions). Using DRIP the company automatically reinvest your $3. Another advantage is ability to purchase only a fraction of a share. For example, if one share worth $5, then you could buy 0.6 of share reinvesting the $3 dividend.

Being able to invest small amounts of money, you can build a portfolio and diversify your assets without having thousands of dollars. Another benefit is dollar cost averaging. Investing regularly fixed amounts of money will result in buying less shares when their price goes up, and more shares when their price goes down.

Another benefit of DRIPs is possibility to invest automatically. You could arrange that your bank send 50$ each month to the company of your choice. Using this technique you will free some of your time and invest on autopilot. There is a great chance not to invest if you have to think about it. This way you will have to invest your time only once.

The problem with DRIPs is that you will have to invest a certain amount of time in research. You have to find the companies that allow DRIPs. After that you will have to buy the first share. That means that you have to find a low commission broker, or to find a way to buy a share directly. That process you will repeat for each company you chose. There is a little bit of work, but you could tune your system to work without you.


Places to find DRIPs

DIRECTInvesting
DripWizard

Things you could do right now to start investing

You want to start investing but you cannot find time for analysis and education about investing. If you want to start with investing you should certainly find some time, but in the mean time, here is what you could do right now.

1. Eliminate your debt

Eliminating debt is not a classic example of investing. But I think that should look on paying credit card debts as a kind of investment. The reason for that is the fact that average credit rates is 14% annually. You will have to try really hard to beat 14%, and not to mention that it can be much higher, up to 20 or more percent. Keep in mind that average return rate on US stock market is about 10.5%. Therefore, if you have $100 in your pocket, and you don't need that money too much, go right now and payout your debt even if it is a small part.

If you have several credit cards, than you should pay out the one with the greatest rate. For example, let's say that you have three credit cards: the Credit card A with $1000 of debt and 15% rate, the Credit card B with $3000 of debt and 16% rate and the Credit card C with $200 of debt and 18% rate. You should payout the debt on the Credit card C first, and then start paying out debt on the Credit card B.

There is another hint that is general in life: Simplify. That means that you should tend to eliminate number of credit cards in the game. The reason is that you cannot maintain a long list of credit cards. If you have ten credit cards, than there is 10 different debts, 10 different rates and each factor that could be specific is multiplied by 10. Therefore to track what is going on with your credit cards you should check at least 30 and more parameters. It takes time to find all necessary data. Also, if something is too complicated that would lead you not to do it. And not tracking your credit cards is very dangerous.

Does it mean that you should not have any credit card? Yes, almost any credit card generates some expenses even if you don't have any debt on it. It is much better to have cash instead of debt. On the other hand, life is full of unexpected events, so some kind of cushion in the case of emergency is certainly necessary. So what should you do? Eliminate all your credit cards and take one with the smallest rate and smallest yearly fee. And don't use it.

2. Quit with smoking and junk food

What does smoking have in common with investing? First of all smoking costs you. You can calculate how much money do you smoke each year relatively easy. Determine how many packs do you smoke each month, multiply that with 12 and with the price of a single pack. And that is not all. If you smoke there is a greater probability that you contract some kind of disease in life, and any disease, even not so dangerous will pull money out of your pockets in the form of medications and in the form of smaller income. And there is more. If you want to buy some insurance, smokers usually pay more for it.

What does junk food have in common with investing? More than you think. Junk food is almost as dangerous as smoking. Eating a lot of junk food leads to poor health and the same problem with money as smoking.

3. Track your expenses

Use your favorite spreadsheet program and start tracking your expenses. Keep it simple in order to be able to do it regularly. Amount, date, and category is enough for the start. The category is your classification of expenses. For example, gas, tires, broken windshield you could put in the car category. One category could be junk food, or eating out or something like that. For some time don't do anything, just track expenses. After several month you will notice if you need some more categories or to tune your system up. Anyway after several month you could begin with analysis of tracked expenses, i.e. to sum them using your categories. Then you could act on it. For example you could change your car as it might be cheaper than to use existing one.

4. Find a blue chips that allows drip investing

What is he talking about? First of all, blue chips are very large and stable companies. Drip investing is a kind of investing where one could invest a small amount of money regularly. For example you could invest in Coca Cola as low as $10 per month. Ten bucks per month is certainly feasible for anyone. You don't like Coca Cola? Try Pepsi! Or try Google with "drip stock list".

What is an investment plan?

Basically, an investment plan is your plan to achieve a certain financial goal. That is quite obvious, but people tend to forget about goal setting. They say “Who needs planning? I just want to be rich.” This is a straight road to financial hell. If you don’t know what do you want, then you won’t have any guidelines for your actions, and you’ll probably be under emotional stress. Fear and greed are very powerful emotions and they can drive you to the undesired outcomes.

In order to help you, the first thing you will need to know is how much money you can invest. This could be an amount for a week, month, year or some other period of time. If you are in debt, your first step is paying it out. You should, also, consider future investments amount. For example, if you are going to be married and you are the only one that works, it is likely that your investment capability will be lower in the future.

The next step is to resolve how much do you need and when. Using these parameters, you can calculate the return rate of your investments. For example, let’s say that you are going to invest 600$ per year (that’s 50$ per month) and that you want to withdraw 20,000$ after 20 years. This means that your average return rate should be about 4.6% per year, which is not very high rate. In the previous 20 years average return rate of Dow Jones was 10% per year.

Return rate	Net sum after 20 years with yearly addition of 600$	Net sum after 20 years with yearly addition of 900$	Net sum after 20 years with yearly addition of 1200$	Net sum after 20 years with yearly addition of 1800$
3%	16606	24909	33212	49818
4%	18581	27872	37163	55745
5%	20832	31247	41663	62495
6%	23396	35093	46791	70187
7%	26319	39479	52638	78957
8%	29654	44481	59308	88961
9%	33459	50188	66917	100376
10%	37801	56702	75603	113404
11%	42759	64139	85518	128277
12%	48419	72629	96838	145258

You can calculate the resulting amount of money for any yearly addition. Let’s say that you could invest 3000$ per year and that after 20 years and that you would like to have 200,000$. That means that you should have return rate between 10% and 11%. 5 times 600 is equal to the 3000$, 5 times 37801 is equal to the 189005$ and 5 times 42759$ is equal to the 113795$.

This way you can determine required return rate and the types of investment. Also, it can happen that your desire doesn’t match reality. For example, if you wish to invest 600$ per year and you want 100,000$ after 20 years that would mean that you need return rate of around 18% and that is very unlikely to achieve. Therefore, you should lower your expectations or you should increase your yearly addition.

With these parameters, you can find asset allocation that should give you required result with the lowest possible risk. There is a theory that helps you to do this. We will elaborate this in details some other time. Let’s just say that with this you can select assets that should be in your portfolio.

To sum it up, investment plan takes into account your desire and as a result it finds out what kind of assets you should have.