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MARKET COMMENT
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DRiPs is an acronym for Dividend Re-investment Plans. These are schemes operated by companies that allow investors to re-invest their cash dividends in shares. In America, DRiPs are very popular. When I last looked, there were almost a thousand companies in the US operating DRiPs. In Britain, DRiPs are less common though the position is slowly improving.
In my view, DRiPs are great for investors who plan to hold their shares for the long-term. So instead of receiving quarterly or half-yearly dividends in the form of cash, the money can be quickly re-invested back into shares. The cost of investing through DRiPs tends to be much lower than buying the same quantity of shares through a broker. A company that offers DRiPs will normally aggregate its purchases, and share the cost over a large number of investors. Finally, and perhaps most importantly, DRiPs underline the one of the main principles of stock market investing, namely compounding. This is where money generated from an investment is used to make even more money. By re-investing your dividends quickly, that money is put to use to generate even more dividends! The Cons
There can be some disadvantages to DRiPs and here are a few of the more notable shortcomings. Firstly, keeping tabs on the price of DRiP purchases can be quite bothersome especially when it comes to filling in your annual tax return. Whilst companies will generally notify their investors within 10 days of share purchases those bits of paper can be quite a nightmare for less well-organised investors. You also have no control at what price those DRiPs shares are bought at either. You may perhaps feel that the shares in the company are fully valued, and that further purchases may be inadvisable. However, with DRiPs that decision is taken out of your hands. Finally, not all brokers like to offer their clients a DRiPs service. After all, brokers are hoping than you will buy and sell shares regularly! For that reason the shares need to be registered in your name rather than through a nominee account. Despite the drawbacks, I quite like the idea of DRiPs. I have signed up for Dividend Re-Investment Plans with a number of companies that I intend to invest in for the long-term. If you want to know whether a company offers DRiPs just contact the company's share registrar. The main share registrars in the UK are Lloyds TSB Registrars, Capita and Computershare Investor Services. Lloyds TSB even has a nifty drop-down menu that tells you at a glance which of their clients offers DRiPs.