Direct reinvestment plan advantages and disadvantages?

Answer 1

By Marshall Loeb, MarketWatch

NEW YORK (MarketWatch) -- In volatile markets, it's easy to lose your cool and stray from your investment goals. One tool that can help you stay the course is a dividend reinvestment plan, or DRIP. They give shareholders the option of reinvesting their dividends in company stock rather than taking a cash payout.

From the Motley Fool.com, here are three advantages of DRIPs:

1. They provide a cost effective way to put your dividend dollars to good use. Rather than spending the money or having it sit in a bank account, the money can be used to buy more stock. Almost all of these programs allow dividends to be reinvested for no fee. In a rough market, this is a great way to buy shares at a lower total cost.

2. Participating in a dividend reinvestment plan forces you to buy stock on a regular basis. If you're enrolled in a DRP, your money will automatically be reinvested. As a result, with very little effort, you'll adopt a long term horizon for your investments.

3. Most DRIPS carry an option called optional cash purchase.These allow investors to purchase additional shares for a nominal fee. Many optional cash purchase plans have low minimum investment requirements. Some you can invest in with as little as $10. Maximum investment limits vary depending on the plan, though usually that figure reaches into the thousands.

One disadvantage of DRIPs is you must keep track of the cost basis on your individual purchases and maintain your own records. If you don't, you'll have a lot of work if you ever decide to sell the stock and need to pay tax on your gains.

Marshall Loeb, former editor of Fortune, Money, and the Columbia Journalism Review, writes for MarketWatch.