When I was 14, my grandparents set me up with a Dividend Reinvestment Plan (DRIP.) I picked out the stock I wanted, Pepsi Co. (PEP.) At the time, they bought one share through their broker in order to take part in fractional share purchases and dividend reinvestment. They funded additional purchases based on how many As and Bs I made in high school. By the time I was a senior in college, I cashed out (start of my negative spending habits) over $3,200 in PEP and over $800 in the spin-off, YUM. I have always kept the single paper share and recently started investing again, $50 at a time.
It’s much easier now to make an initial investment to enroll in a DRIP. You can purchase stocks directly using Computershare (click for all stocks participating in the Direct Stock Purchase Plan.) Using PEP as an example, you either need to own 1 share currently or invest a minimum of $500 to enroll.
The best part of this type of plan is that you can dollar-cost average, such as invest $50 monthly no matter what the stock price does. This takes emotion out of your investment decisions and probably the best investment strategy for nonprofessional investors.
Once you purchase the stock, you have the option to receive dividends or have them reinvested if the stock pays a dividend. I recommend reinvesting until you retire to build up an extra income stream at retirement. I earn a whopping $9.03 annually with my PEP investment of 3.4 shares. Hopefully one day I can brag about earning $12,000 per year.
There are some fees associated with purchasing direct and fees for dividend reinvestment and additional share purchases. PEP has a $10 enrollment fee, which is about what an online brokerage would charge, $.03 per share dividend reinvestment fee, and $2-3 dollars for purchasing additional shares, depending on whether direct deposit or mailing a check. Selling shares are more expensive, $25 plus $0.12 per share. Also note that even if you reinvest the dividends, you are still taxed in the year they were paid in the plan.
I receive a quarterly statement that gives me my balance, dividends and options to transfer shares, sell, purchase, or make other changes to my plan.