Dividend Reinvestment Plans (DRIPs) are an investment option offered by corporates to its shareholders under which the dividends due to the investors are directly reinvested in the new stocks issued by the corporation.

Such a plan is beneficial for long-term investors, as the money gets reinvested immediately and the investor does not have to incur any brokerage fee for buying the stocks. There is also no wait time between receiving the money and reinvesting it. Under such a plan sometimes the existing stockholders are offered new stocks at a discount to the prevailing market prices.

If the dividend being reinvested is not enough to buy a full stock, then the money will be used to buy fractional shares.

If you are interested in buying a DRIP stock, then following steps will help you in the process.

1. Find stocks that have a DRIP

Not all stocks offer a dividend reinvestment plan. So, the first step is to identify the stocks that have a DRIP. You will be able to find this information easily by doing online research or by talking to your broker to help you identify such stocks.

2. Enrol into a DRIP

You can enrol into a DRIP either directly by approaching the investor’s cell of the company or through a brokerage firm providing this facility. In either case, the shares will be purchased in your name. The better way is to buy DRIPs via your broker so that all your investments are organized in one place.

3. Check the company requirements

Once you have decided which company’s DRIPs you want to buy, the next step is to understand their requirements such as minimum investment amount, minimum number of stocks you can purchase, and any fees that you need to pay.

4. Setup automatic investment in DRIP

Once the DRIP has been purchased, your dividends will start getting reinvested. You can also setup an automatic investment option for your DRIP so that each month more money from your savings account will get invested in the DRIP. This way your DRIP will start growing along with the dividend reinvestment.

Note that the dividend earning on your stocks is taxable income and the investor is required to pay the required tax on this income even though the dividend gets reinvested directly.