What is drip and how do i know if that stock, etf, or mutual fund is drip or not?
Question:
Answer:
DRIP stand for Dividend Reinvestment Plan. DRIPs were popular in the 90s but have not heard much about them in recent years. Basically, dividends company pays to investor is used to purchase shares and you basically reinvest the funds to purchase stock. Papermoney has list of all DRIPs available and I have put the link below.
I checked Scottrade site and according to them:
Stock Dividend Reinvestment
Scottrade does not currently offer dividend reinvestment as an account option.
Cash dividends which are paid to your account are automatically swept into an interest bearing cash account.
You have the option to have the cash dividends mailed from your account. Dividends are mailed twice monthly.
Please contact your local Scottrade branch office to request this option
If you wish to participate in a dividend reinvestment program, you would need to sign up directly through the transfer agent of the company in which you own stock
You will need to hold the physical stock certificate in order to participate in the program
To request a certification be mailed to you, please contact your local Scottrade Branch Office.
If you own dividend paying stocks and you don't need the dividend cash in the near term, then a dividend re-investment program or DRIP is a great option. Your returns over the long term will be much better.
There are two basic ways to do it. One way is to send your money directly to the company whose stock shares you are buying. The company then sells its shares to you at zero commission and then holds the shares for you. Then when they pay out the dividend, they give you more shares instead of cash, also with zero commission. Many companies do this, but many do not.
I know of one company "American Capital Strategies" that has a high dividend (7.7%) and if they hold your shares they will give you a bonus DRIP. You will receive 5% more shares in their DRIP than the regular dividend would have produced.
The second way is to use a broker like ETrade or TD Ameritrade. Once you've bought a stock, you can enroll the holding in a DRIP. Then when the dividend cash arrives in your account ETrade will automatically trade the cash for more shares at zero commission. The zero commission detail is very important. Otherwise the fees eat up the value of the dividend payout.
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