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!