The dividend reinvestment program, or DRIP, allows you to buy stocks directly from an issuing corporation without paying a commission, but not all companies offer this. No legislation authorizes the program, which is essentially an agreement between the investor and the company. In an era when you can buy and sell stocks for commissions of as little as $3 per trade, you may decide not to buy individual stocks through a DRIP program, but it is a way to buy and sell stocks without being charged for the trade.
Initiate a DRIP with any of the more than 1,000 companies that offer them by contacting the company at its investor relations phone number or address. Some only allow you to reinvest dividends; others let you buy additional shares. Twice a month, for example, Puget Power and Light allows you to add funds from $25 to $20,000, the annual limit, to buy additional shares of Puget Power and Light.
Synthetic DRIP programs
Alternatively, set up a synthetic DRIP. One disadvantage of the original DRIP is that it requires the investor to set up a separate DRIP program for each company. Some brokerages offer a modified version of DRIP with a similar benefit and greater convenience. These programs, called synthetic DRIPS, allow you to instruct the brokerage to automatically disburse cash dividends from any stock you own into a pool of your dividends and to use pool funds to periodically buy other stocks, commission free, as you designate. The advantage of synthetic drips is that you can initiate the program with your brokerage, then have dividends from all stocks in your account flow into your dividend reinvestment pool without setting up separate agreements with each company.
Buying DRIPs and Synthetic DRIPS
Several companies offer guides, either without charge or for a small annual fee, to all existing DRIP and synthetic DRIP programs. One such guide is "The Moneypaper Publications LLC Guide to Direct Investment Programs." These attempt to list every company that offers a DRIP program, along with minimum requirements (usually the prior purchase of a single share of the company's stock), application procedures and mailing addresses. Many of these guides offer similar information for synthetic DRIPs -- the brokerages that offer them and specific enrollment requirements.
Hidden Costs of Other Programs
DRIP and synthetic DRIP programs have no hidden costs. Commission-free mutual fund purchases, on the other hand, often do. Although investors can select "commission-free" mutual funds and ETFs, the fund's management generally reimburses the brokerage for some portion of the commission. If the fund pays a commission to the brokerage, it's likely that in some form or other these costs are passed on to you. All fund expenses reduce the return on your investment.
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