The stock market’s rally at the end of last year has reignited animal spirits on Wall Street. Growth stocks are hot again. Who wants a 4% annual dividend yield when it seems like tech stocks are going up that much every week?

I’ll tell you who wants a 4% dividend yield: Income investors. Especially retirees, who need that money to make ends meet. The only way to pay the bills with share price appreciation is to sell some of your stock. They don’t like doing that.

Another group that prefers steady dividends over erratic growth are conservative investors with a low tolerance for volatility. These investors may not need the dividend income now, but they like knowing they are getting some return on their investment all the time.

In that case, a Dividend Reinvestment Plan (DRIP) may be appropriate. Many companies with a long history of paying high dividends offer a DRIP, and here’s what you need to know about them.

What is a Dividend Reinvestment Plan?

As its name implies, a Dividend Reinvestment Plan allows you to have your dividends reinvested into more shares of that stock. Some DRIP administrators, also known as transfer agents, charge a modest one-time fee to get enrolled. After that, you may not pay another dime when you buy stock in that company through their DRIP.

In other words, a DRIP cuts out the middleman. This is particularly important if you are a small investor. After all, if you were making small, regular investments in several different companies through a broker, the commissions might cost more than the stock itself. That’s a poor way to save!

Once you are enrolled in a company’s DRIP, you can make additional investments by remitting funds to the transfer agent. In general, investments can be as little as $25 to more than $5,000. A growing number of companies will even let you debit funds automatically from a bank account.

Dollar-Cost Averaging Made Easy

Because it allows you to invest a fixed dollar amount on a regular basis, regardless of how many shares those dollars buy, a DRIP is a form of dollar-cost averaging. It forces you to buy more shares when the price of a stock is low and fewer shares when it is high.

This makes a lot of sense because the logical time to invest in a company is when prices are down. Stocks are cyclical: Over time, they go up…then down…and back up…and so on. Convincing yourself to buy more shares during a down market is not an easy thing to do. Pessimistic emotions are generally triggered by lower stock prices.

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Those who follow dollar-cost averaging with a well-diversified portfolio should outperform the overall stock market over the long haul. They will buy more shares when stocks are at bargain prices. Such a systematic approach to investing will reward the patient investor.

How to Enroll in a DRIP

Enrolling in a DRIP is easy. There are two ways to enroll in most plans:

1. You can go through a traditional broker and buy the number of shares required by the company to qualify as a shareholder. Generally, the number is at least a single share of stock. Once you have proof of ownership, you contact the company’s transfer agent to request enrollment in the plan.
2. Some companies also allow you to get enrolled directly through a transfer agent. Be aware that most transfer agents charge a small fee for each investment through the plan.

For example, energy producer Chevron (NYSE: CVX) offers a DRIP using Computershare as its transfer agent. Since we first recommended Chevron to our readers in 1990, it has delivered a total return (share price appreciation plus dividends paid) of nearly 3,000% through the end of 2023. But without reinvesting the dividends, the return drops below 800%.

Creating a DRIP Portfolio

As well as Chevron has performed, we would never suggest using only stock for this purpose. Fortunately, there are dozens of other companies with comparable track records you can choose from.

In addition to the energy sector, most companies in the utilities and financials sectors offer DRIPs. Also, you can enroll in a DRIP for most pass-through securities including REITs (real estate investment trust), MLPs (master limited partnership), and BDC (business development companies).

Just remember to always strive for high-quality companies with brand name recognition that you believe have staying power for the long term. Since you are not making a lump-sum investment, the timing of your purchase is not as critical as it otherwise would be.

Editor’s Note: For market-thumping gains with mitigated risk, I suggest you also consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron, and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

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