What are DRIPs?
When you own stock in a company, you may have the option to participate in a dividend reinvestment program (DRIP). A DRIP automatically reinvests your shareholder dividends in more shares of the same company's stock. When you are due a dividend, you are issued more shares of stock instead of a cash dividend payment. In some cases, the issuing company will cover the broker's fees and may even provide the additional shares at a discounted price. That means you get more bang for your investment buck. These plans allow companies to raise capital without conducting a new public offering of securities.
In addition to those bonuses, you benefit by accumulating shares in the company automatically and incrementally over the long term. In that regard, DRIPs have advantages similar to those provided by automatic investment plans. Periodically, a portion of your income (in this case, dividend income) is automatically invested without the need for you to make a separate investing decision each time.
DRIPs also have some advantages similar to those of dollar cost averaging plans. Your investments are made periodically so that you can take advantage of fluctuations in the market and hopefully achieve an overall lower average share price than if you made a one-time investment at the wrong time. Remember, to achieve the advantages of a diversified portfolio, you do not want to invest all of your savings in only one DRIP. By investing in a number of DRIPs offered by different companies in various industries, you can reduce your portfolio's exposure to the risk that shares of one of the companies will decline in value.