The chief foil to investing success is the tendency to react emotionally to day-to-day stock price movements. Should you buy on the dip or sell? You won’t know until it’s too late.
The ease of action in a brokerage account entices you to act. With DRIPs, investors establish a plan to build holdings by making scheduled (or unscheduled) investments over a period of years until the dividends alone keep the account growing. This subtle difference accounts, for the success-advantage DRIP investors enjoy.
The ability to diversify and to invest dollar amounts (instead of buying shares) makes the difference.
Here’s why those are two critical factors:
Diversifying among market sectors is an uncontested risk-reducing strategy. Diversifying holdings within a traditional brokerage account, where you generally buy in 100 share lots, is more limiting than diversifying among DRIP companies, where a small dollar amount is all you need to open an account. (or as a shareholder by owning even a single share of company stock).
Before you buy your first DRIP stock:
Calculate how much you can afford to put away for stock investing each year. With that information in mind, you can decide how many companies you should own in your portfolio. The minimum accepted by most companies as an investment amount is $25 or $50. Once you know your budget for the year, you can decide how many companies, how much you will invest in each, and how often. When you invest the same amount of money regularly, you buy more shares when prices are low and fewer shares when they are high (a $100 investment buys only one share when the share price is $100 but it buys five shares when the share price is $20). If you are investing over the long-term, you are likely to be buying at lots of different price points. Always buying more, low, and fewer high!
The key to success is deciding on your strategy in advance and sticking to it—and DRPs help you do that.