What is DRIP investing and should you consider it?

What is DRIP investing?

Dividend reinvestment plan (DRIP) is an investment strategy in which a fixed amount of money is automatically invested in, let's say, stocks or bonds, on a regular basis. DRIP Investing provides for smaller and more consistent investments over time rather than one large lump sum. This can help to limit the effects of market changes and lower the total cost of investment. It can also be an excellent way to begin investing or to supplement an existing investment portfolio.

Here's how this type of investment works You enroll in a DRIP through a brokerage firm. When the company that you have invested in declares a dividend, you will receive the payment in your account. But instead of spending that dividend, you can have it automatically reinvested in more shares of the same stock.

What are the pros and cons of DRIP investing?

One of the biggest pros of investing in a DRIP is being able to earn profits by compound interest. This investment strategy not only earns you return on your original investment but also accrues interest on the reinvested money that you received as dividends. And, the whole process of DRIP Investing is automated, so you don’t have to worry about manually buying more shares. Plus, the returns are not charged with any commission or brokerage fees.

Another benefit of a DRIP is rupee-cost averaging. It means that you invest a fixed amount of money at regular intervals which helps smooth out market fluctuations. This reduces the impact of market volatility on your investments.

However, DRIPs have a few cons as well. It can limit your voting rights in a company. DRIPs often have specific rules regarding the purchase, sale, or liquidation of assets which reduce the ability to exercise voting rights. Another limitation is that in an emergency case, DRIPs tend to take more time to sell.

What are the different types of DRIP Investing?

You can invest in DRIPs in two ways. Individual corporations offer traditional DRIPs, where you can reinvest dividends in more shares of the company's stock. Such traditional DRIPs typically allow you to reinvest all or part of your dividends.

While exchange-traded funds (ETFs) offer ETF DRIPs. They allow you to reinvest dividends in new ETF shares. In ETF DRIPs, you can reinvest all or a portion of your dividends.

Conclusion

DRIP investing can be a great method to accumulate money over time, but you should be aware of the potential benefits and drawbacks before investing. DRIPs can truly help you build a diversified portfolio while also being a comparatively low-cost way to invest in stocks.