DRIP Your Way to Investment Success
Dividend Reinvestment Plans (DRIPs) are an excellent programs to build a position in a particular company with little or no costs to invest. Many companies now offer these programs directly to investors.
Here's How it Works
You sign up with a company that has a DRIP to make periodic investment in the company's stock. For example, you decide you like McDonald's (ticker symbol: MCD-- currently trades in the high 50s), so you sign-up to invest $50 per month directly with McDonald's. If McDonald's is trading at $25 you would get two shares that month, next month if McDonald's is trading at $100, you get one half share.
Little by little, month after month you start building a position in McDonald's. As McDonald's pays dividends they should be reinvested to help build you position faster. DRIPs take advantage of Dollar Cost Averaging (DCA) a concept that seeks to lower you average cost of ownership (I will explain this concept in my next post).
Here's What to Do
Pick an amount that you feel comfortable investing each month. The other thing to remember with DRIPs is that it is best to enroll in a company you are really interested in owning long-term. You should look for a solid company that has a history of paying dividends. Start small and grow your investments over time.
I have DRIPed McDonald's and I would like to DRIP Wal-Mart, Coca Cola, and Johnson & Johnson-- I like consumer products companies with strong household brands.