DRIP Investing, Step by Step
And Now the Bad News. . . .
DRIPs do have their disadvantages. Most of these drawbacks are pretty minor and investors who use DRIPs find that they can work around the inconveniences and maximize the benefits for their portfolio.
Fees are a consideration, but it's possible to invest in many DRIPs at much lower fees than even the cheapest broker. Fees vary by plan, so you just have to be aware of all related costs before you enroll in a DRIP, and plan accordingly.
There are many differences from plan to plan, so the following are just generalizations and don't apply to all plans.
You have little price control when you invest in most DRIPs. 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 much higher or lower by the time your purchase is actually made in 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 of that date, giving you little control over the sale price.
There are only a limited number of companies who offer DRIPs. Even if 1,600 companies have DRIPs, there are still 7,000+ companies on the NYSE, Amex, and NASDAQ that you can't invest in through DRIPs.
DRIPs may not be for you if you depend on a broker to recommend stocks. You have to be able to make your own investment decisions if you want to invest in DRIPs.
Tax considerations and recordkeeping are other disadvantages that come with DRIP investing. Continue reading for more information about these topics.