Individuals who want to invest in the stock market have options. Those choices include opening a brokerage account or acquiring shares directly through a dividend reinvestment plan, commonly called DRIP, offered by the company. The advantages and disadvantages to each method depend largely on perspective. That perspective is shaped by factors such as an investor's time horizon, amount of money available and personal preference.
Dividend Reinvestment plans have the advantage when it comes to investor fees. DRIP fees are traditionally lower than broker fees and, in some cases, companies do not even charge DRIP fees. Even when DRIP investors pay an initial fee, they do not typically get charged when dividends are reinvested into the company. Investors using a stockbroker can be charged transaction fees each time they buy and sell equity shares. Some brokers offer a direct-investment option but unlike DRIPs, brokers charge investors who invest money in excess of the reinvested dividend amount.
Investors can choose from a group of about 1,200 stocks that have DRIP programs compared with tens of thousands of stocks that are available for trading using a broker. High-growth technology stocks in particular tend to rely on any extra cash they earn to reinvest and expand their businesses. Consequently, most high-tech companies do not historically pay investors' dividends and therefore do not offer DRIPs. Clearly, there is a larger universe of stocks to choose from when using a stockbroker.
Investors who use DRIP programs are less likely to be swayed by emotions and sell shares of companies prematurely, according to a 2012 article on the Investing Daily website. DRIP investing is a disciplined approach in which investors generally must wait for the value of dividend payments to grow to be rewarded. Considering the ease of buying and selling stocks with a broker, investors are more inclined to miss out on profits by selling shares before profits are realized. When investors do choose to sell a DRIP, however, it can take weeks to receive the sale proceeds while stockbrokers can process a sell transaction in a number of days.
When it comes to convenience, stocks purchased from a stockbroker have the upper hand. Investors have to file with the IRS and pay taxes on the profits that they earn from dividend stocks. By investing with a broker, that paperwork becomes consolidated and can appear on a single statement. Conversely, investors who use DRIPs receive individual tax documents known as 1099 forms for each of the companies in which they are invested.
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