Dividend reinvestment has a snowball effect on future dividends. When the company makes money, it shares the profit with the stockholders in the form of a dividend. Many people receive their dividend in the form of cash, but it is often minimal for smaller holdings. If you select dividend reinvestment, you purchase additional shares or fractional shares of that stock with the money. The increased number of shares brings you even more dividends the next time. If the stock produces a high dividend, or you hold it for a number of years, the increase in the number of shares is significant.
You will find many of the stocks that offer the dividend reinvestment feature at directinvesting.com (see link in References). Browse through the list to look for specific companies. Once you purchase the stock, you'll want to support your company. You can ride your Harley to Wal-Mart wearing your Nikes to purchase Kellogg's breakfast cereal and Disney films, just to help produce more dividends.
The number and types of companies that offer DRIPs, direct reinvestment programs are quite lengthy. You'll find as many as 1,500 companies offer this service. The stocks include pharmaceutical companies, banks, railroads, chemical manufacturers and food manufacturers, to name a few.
The size of the company does not dictate its profit. Often, smaller companies streamline their business and produce high profits. Some of the companies that offer DRIPs include names you'll recognize immediately. The next time you have a bottle of slow-pouring ketchup, remember that Heinz has rapidly growing stock with its DRIP program.
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Direct reinvestment programs have a negative feature if you own large amounts of stock. The dividends are taxable even though you reinvest them into new stock. The good news is that the amount of dividend you received then adds to your basis when you sell the stock. For example, if you purchased Paychex Inc., signed up for the company's DRIP and years later sold all the stock, the dividends you reinvested offsets much of the money you receive. This means you would pay a lower capital gains tax.
Give a child a head start in investing by purchasing a smaller amount of shares directly with a company from the list, using its dividend reinvestment program. The amount of stock becomes huge by the time the child retires if the company continues to grow. The National Association of Investors Corp. also supports the idea of buying dividend reinvestment stocks and provides extensive educational info for its members.
Even when stock prices drop, you can be excited because you'll be able to buy more shares with the dividends the stock produces. Many times, these programs are particularly beneficial in recessionary times.
If you own a stock and hold the certificate or have the transfer agent for that company hold your stock, you often have the opportunity to reinvest the dividends sent to you each year. Sometimes, brokerage houses allow you to have a dividend reinvestment option on the stocks they hold for you and don't charge either. Frequently, it depends on whether the company whose stock you hold pays the fee to purchase the shares. The cost is much lower than if you purchased the shares outright and you get fractional shares.