Why investors like DRIP? - The advantages of DRIP

So, why should you care about DRIP? There are a number of reasons you should consider DRIP as part of your investment strategy, or part of your financial planning.

The advantages of DRIP can be summarized as follows:

• Start small - This is one of the best features for DRIP. You can start with as little as $100, $50 or even $25.
  
  
• Low fees or no fees - This means as an investor you can save a bundle from brokerage commissions in the long run.
  
  
• Automatic Dollar-Cost Averaging - By participating in DRIP, you are effectively taking on one of the best investment approach: "dollar cost averaging". It means you invest a fixed number of dollars on a regular basis regardless of how many shares those dollars can buy. The “dollar cost averaging” method will reduce your exposure to market risk and stock price fluctuation, while keep you invested for the long-term growth.
  
  
• Continuous re-investment and Compound growth - Keep in mind that your money in the DRIP is growing continuously with capital appreciation and dividend reinvestment.
  

Disadvantages of DRIP

DRIP do have its disadvantages:

• Barrier to entry do exist.
  In theory, DRIP is open to every individual investor. But you will find out it's not easy to start out your DRIP journey. Simply to acquire your first share will cost you considerable amount of money on commission and share certificate charges. In order to participate into different DRIP plans, you also need to fill out different forms and contact various transfer agents.
  
  
• Fees are a consideration.
  As mentioned earlier, it will cost you a bundle just to acquire every first share in the company you want. It's also possible to be charged later in some DRIP plans. So do you homework, be aware of all related costs before you enroll in a DRIP, and plan accordingly.
  
  
• Loss of price control - Generally you don't have much control over the buying and selling price on the shares you hold, compare to the flexibility with your brokerage account. The purchase date is set each month, and your money has to be received by the plan a week or more in advance of that date. The price could be either higher or lower by the time the share actually been bought into your account. You can't sell shares quickly in a DRIP. Many DRIPs sell on the purchase date, and your order has to be placed well in advance, giving you little control over the sale price.
  
  
• Limited choice - Compared to the vast family of public companies, DRIP eligible companies only represent a tiny fraction of the whole equity market. There are about 1600 companies offer DRIP among 7000 plus companies listed on NYSE, AMEX and NASDAQ. In Canada, there are only about 130 companies you can put your money in their DRIP plans.

• Tax complication - Remember one thing, DRIP is not RRSP or 401K. Your money earned from DRIP is still taxable. Tax should be one of the consideration before you start your DRIP investing. If you participate in a DRIP over a long period of time, determine the tax consequences of selling your shares can be a real challenge, unless you keep detailed records as you go along. The cost base of your shares for tax purposes includes the price you've paid for each of your shares, as well as the shares you bought with the dividends you re-invested.