DRIPs, offered by more than 650 companies, are programs that
allow current shareholders to purchase stock directly from a company, bypassing
the broker and brokerage commissions. (Individuals typically interact with a
transfer agent, an entity a company hires to administer its dividend
reinvestment plan.)
Investors purchase shares with dividends that the company
reinvests for them in additional shares. Most dividend reinvestment plans also
permit investors to make voluntary cash payments directly into the plans to
purchase shares. In some cases, companies charge no fees for purchasing stocks
through DRIPs, and those that do charge only a nominal fee.
Another benefit is that investors buy full and fractional
shares of stock, thus putting all of their investment funds to work. Finally,
the plans are perfect for investors with a small amount of investment funds.
Indeed, minimum investments in most plans are $250 or less.
DRIPs may differ dramatically from one company to another.
For example, although most DRIPs require shareholders to own only one share in
order to enroll, others may require investors to own as many as 50 shares in
order to be eligible. And some DRIPs will allow any investor to buy even
initial shares directly.
Companies and their transfer agents do their best to help
dividend reinvestment plan participants keep track of their investments.
Investors receive statements, usually after each investment with dividends and
optional cash payments. Make sure you keep track of this information, especially
your cost basis for each purchase of stock.
This information is essential when you sell shares and need
to determine your cost basis for tax purposes. Also, at the end of the year,
companies send 1099 forms showing the amount of dividend income that was
reinvested during the year. This information is important since such dividends
are taxable income each year even though the dividends were reinvested in
additional shares.
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