DRIPping

#2 recently asked me what it means to undrip.

It is a reasonable question because it’s not really a word, and she’s right, I should have capitalized it.

DRIP stands for Dividend Re-Investment Plan

Dividends happen when a company decides to share profits with people who have invested in the stock, rather than to take those profits and reinvest them directly in the company (by say, buying more capital stock, branching out etc.)  Dividends are nice because they give you monies just for having money and being willing to take some risk in owning part of a company.

Normally when you buy stock, you have to pay monies to a broker to buy that stock. It used to be a lot of monies, but these days it’s only like $10/transaction with discount brokerages.

But you can sidestep that fee by buying stock directly from the company if you already own stock in that company.  DRIPping happens when you use your dividends monies to buy the same stock from the company.  So instead of getting cash monies, you’re investing in the stock market and don’t have to pay the fee to make that investment because you’re dealing directly with the company instead of a broker.

Un-dripping is a made-up word that means you stop reinvesting your dividends and you get the cash monies instead.  For example, I had been dripping a single-company stock which gives me a few hundred dollars in dividends every quarter.  But that was silly because it was overinvesting me in a single stock (of a company that has actually gone bankrupt in the past), so I undripped it and just take the money now.   Now I try to just drip my indexes, since presumably I would be buying more of those anyway if I had more money.

If we had a negative income shock, like unemployment, then I could undrip the (index and exchange traded) funds in my taxed stock portfolio (like DIA, QQQQ, EFA, VFINX… ), and then they would give me a couple thousand more in cash monies each year without me having to sell any stocks.  These monies are currently tied up buying more stocks, even in the summer when we don’t have income.

Money Reasons has a lot of posts about his dividend-bearing stocks.  They’re a lot of fun.  Dividend-bearing stocks are preferred if you want the income stream– then you don’t have to sell stocks to get income.  They’re recommended for once you’re financially independent.  Some people also like dripping because it helps dollar cost-averaging– you’re investing in the market every quarter.

Some people don’t like dividend stocks because they’re planning on keeping their money invested in the stock market and they would rather have the stock value just keep going up rather than them having to pay taxes on the dividend money.  This strategy especially makes sense if all of your investments are in tax-advantaged funds so you don’t have to pay capital gains (you’re cutting down on money lost to transaction costs).  But if you’re not that wealthy yet, it is nice having a little extra passive income on the side to do things with besides investing in the stock market.  I do have DRIPs set up on my retirement funds because I invest in broad indexes and ETFs and some of them just drop dividends.

Anyway, I love dividends!  Do you DRIP?  Does that make sense?  If not, tell us in the comments and we’ll try to clarify!

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25 Responses to “DRIPping”

  1. Everyday Tips Says:

    I’m a DRIP! I don’t touch my dividends, but then again, most of mine are in index funds. I am just now starting to invest in some individual dividend stocks for fun. My goal is to create a nice income for ourselves in to retirement.

    Are you actively purchasing dividend stocks now?

  2. MutantSupermodel Says:

    I honestly have no idea. I set up a 401k at my old job before I knew about debt repayment strategies. This year, I rolled it over into an IRA and bought some funds. So I don’t think I drip. I’m pretty sure I don’t. Right?

    • nicoleandmaggie Says:

      Hopefully you drip! The way to tell is: if you have a lot of cash sitting in your IRA and that cash grows every quarter, then you’re not dripping. You don’t want cash in your retirement account because it’s earning no interest or next to no interest. If you take that cash and buy separate funds with it when you’re adding to your IRA, not dripping is not such a bad thing– the cash is only sitting there alone and unloved until the next time you buy stocks.

  3. Debbie M Says:

    I don’t do many single stocks. I don’t DRIP the one I currently have because it’s in a place where I can’t buy partial shares. I should just remove the dividend money every quarter and put it into savings (or mortgage prepayment), but at $15/quarter, it doesn’t seem worth the trouble. My broker makes me call. On the phone. During work hours.

    All my other stuff is DRIPping. The only sad thing is that stocks seem to be little bit more expensive than usual the day that all of us DRIPpers are buying.

    I haven’t decided which way to go when I retire. I see the allure of just withdrawing the dividends (if that’s enough) so you don’t have to give up any stocks. However, I think I’ll keep dripping and then sell in such a way as to rebalance my funds.

  4. Money Reasons Says:

    Since I was a small child (5 or 6), I’ve had stock that my Uncle bought me, mostly dividend stocks… They were all DRIPped stocks, and I have to admit, he did right by me. Unfortunately, I used most of that money to pay for college (at least the last year or so).

    Today, I no longer DRIP, instead I accumulate the money and purchase a stock when I have a few thousand dollars and the market is low. Unless there is something horrible going on, I like it when the market has a correction (goes down more that 10%), that’s the perfect time to buy :)

    That said, the bulk of my money is in my 401k, so all the money is DRIPped in that retirement vehicle.

    Thanks for the mention :)

  5. imawindycitygal Says:

    Now that I’ve got some savings built up, I need to look into investing. Currently my only DRIPing is in my 401(k). Researching what I am allowed to invest in will be quite a chore (I work for a regulated company), but doing the right thing is rarely easy.

  6. Suba Says:

    I am a DRIP. (That doesn’t sound nice) Only recently we have started buying individual stocks, before that it was always index funds and the dividends were automatically reinvested. I don’t remember them asking us, good thing too :) Only after I learned about DRIP a couple of years ago, I understood why we were getting a tax bill every single year and no money in sight…we want to buy more dividend paying shares. But there is still so much learn and that scares me…

    • nicoleandmaggie Says:

      Why did you decide to start getting individual stocks? The more I learn about stocks, the less I want to put in individual stocks or even mutual funds!

      • Debbie M Says:

        Index funds are a kind of mutual fund. I think you meant “managed funds.” Your costs are higher because you have to pay for someone to decide what to buy and sell whereas for index funds, they just buy whatever’s in the index. Returns could be higher for managed funds than index funds, but on average, they aren’t.

      • nicoleandmaggie Says:

        That is a good point. Technically yes, index funds are mutual funds that are not managed. However, in common parlance, most people mean managed mutual funds when they say mutual funds. On average realized returns for managed mutual funds are lower than index funds because on average returns meet the market but have more money skimmed off in fees.

  7. First Gen American Says:

    I drip in everything except one stock that is still in limbo from when we transferred our 401K’s. It was after tax money and it’s sitting somewhere and we get a check periodically for the dividends. I keep meaning to move it and I haven’t yet. It’s kinda nice to get a little check once a quarter.

  8. 101 Centavos Says:

    Love that steady DRIP, DRIP, DRIP sound.

  9. brokeprofessionals Says:

    I always pretty much reinvest my dividends without even questioning it. So, it is good to have something that I take as a “definite” questioned, and to look at it from a different angle, at the very least.

  10. A Storm of Roundup Links – February 6th, 2011 | 101 Centavos Says:

    [...] NicoleandMaggie @ Grumpy rumblings of the untenured have some good thoughts on dividend re-investment. DRIPing. [...]

  11. The Passive Income Earner Says:

    I DRIP lots! Sycnthetic and full DRIP with transfer agents. While all my holdings are relatively small, I let them re-invest but I some point I will probably play it differently.

  12. average guy Says:

    I Drip.

    I directly own shares in about 15 dividend-paying companies. So my ownership in those 15 companies increases every quarter.

    In addition, I buy additional shares in one company every month, rotating through the list… so within 1-1/2 years, I have purchased shares in every company.

    It’s amazing how it has grown.

    You can buy shares with no brokers fees for many companies. Many (but not all) transfer agents allow this.

    My goal is to have a strong dividend income by the time I retire. So if I need cash, I will just un-DRIP.

  13. Ask the grumpies: Inheritance advice | Grumpy rumblings of the (formerly!) untenured Says:

    […] to her to move out of utilities (if she chose option 3) and into broader indexes and to set up DRIPs to increase her investments efficiently.  She should also be sure to max out her retirement […]


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