Editor’s Note: I spent last weekend with some friends that I went to high school with during the 1970s. We spent most of the time reminiscing about the good times we had back in the day, conveniently overlooking our youthful indiscretions in favor of our notable accomplishments.

That left plenty of time to talk about what most men our age like to discuss, which is the stock market. Perhaps we view it as a proxy for competing at sports or trying to make the honor roll. For some, the thrill of scoring a big gain on a tech stock is almost as stimulating as scoring the winning touchdown of your high school homecoming game or getting straight As on your report card.

It doesn’t have to be like that. There are easier ways to make money in the stock market than guessing which way the winds on Wall Street are going to blow next. One of my favorite methods for building wealth over time is a Dividend Reinvestment Plan (DRIP). 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.

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.

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