Looking into dividend reinvestment programs.

• Author: Schnepper, Jeff A.

A dividend reinvestment program (DRIP) allows an investor who already owns stock to have his or her dividends automatically invested by the issuer in more shares. These programs, which have been around since the early 1970s, let participants buy additional shares directly from the issuer without paying a broker's commission.

By enrolling in a DRIP, one can buy partial shares with dividends and enjoy the benefits of dollar cost averaging. With dollar cost averaging, additional automatic investments are made at regular intervals. If the price goes up, you buy fewer shares; if it goes down, you buy more shares. In all cases, though, you continue to invest and build up a portfolio.

According to Moneypaper, a DRIP newsletter, about 1,100 companies currently offer these programs. They can be viewed as no-load funds that invest in a limited population of securities. However, there is an entry hurdle to overcome before an investor can participate in most DRIP plans. Since you have to be a shareholder to enroll, you usually have to pay a broker's commission to get started.

Moreover, you have to be a "registered" shareholder -- one carried on the company's books. Most holdings through brokers are held in their street name. You may have to pay extra, at least in time and effort, to have a broker put the stock in your name and send you an old-fashioned stock certificate. Nevertheless, it may well be worth it to open the door to future commissionless trading.

More than 3,000,000 people currently participate in DRIPs by purchasing stock with cash dividends that the company reinvests for them in additional shares. Most DRIPs also let individuals make additional cash payments, in many cases as little as $10-25, directly into the plans to purchase more shares. Companies normally charge little or nothing to purchase stock through their DRIPs.

Recently, more companies have expanded on the concept of no-load DRIPs by allowing direct purchases of their stock without buyers having to be a shareholder prior to participating. This allows one to "play the game" without having to pay the entrance fee of a broker's commission on the initial purchase. In addition, these no-load direct purchase programs are incorporating several attractive user-friendly features on top of the usual DRIP benefits.

For example, many no-load programs allow automatic investments with electronic draws from your checking account. Some will set up individual retirement accounts, and others...