It’s a bit like an investment subscription plan

Here’s a bit of a personal one. Our CEO was once a Marine, and during his training he made  a mistake. Nothing big, nothing important. But to teach him a lesson, his superiors made him hold a water bottle up for hours. The first few minutes he was fine, until he wasn’t. The small water bottle became heavier and heavier, to the point that it was unbearable. A dividend reinvestment plan works on a similar principle. Dividends received from a company are reinvested into it little by little, to then become a larger, substantial amount. Now, that’s definitely something our CEO can hold.

What is a DRIP?

Not to state the obvious, but it is an acronym. We know, we are also surprised that a funky financial term exists. It refers to both a Dividend Reinvestment plan, and to the way this plan operates. What if dividends worked like a subscription plan and would just convert to additional stock? That’s a bit how a DRIP works. An investor can opt into reinvesting dividends into his investment, either in full shares on in fractional shares. This makes is super easy to accumulate investments without additional costs, since there’s no extra brokerage fees and many businesses offer discounts on their DRIP plans. If this sounds too good to be true, we will burst your bubble by saying that yes - DRIP's do account as taxable income. Sorry about that.  

DRIP as loyalty

You could say that a DRIP plan is a bit of a loyalty plan for investors. It makes it easy to reinvest, which means that the investor is happy with the initial investment, and it lowers the price of the stock or fraction of stock. On the flip side, these shares cannot be sold on the open market, as they are handed out exclusively through the company. DRIPS replace a dividend which can be cashed out, providing a reward that is more long-term oriented.

dividend

Keep on dripping hints…

A DRIP uses a unique dollar-cost averaging technique to buy a stock at a convenient price which never reflects the highest or lowest stock price. This is an automatic plan, but it actually refers to a program that is offered by a public corporation to its investors and periodically reinvests the dividends (making the process more resistant to fluctuations in the market). To make this sound even more appealing, we want to let you know that one can have a DRIP plan AND get some dividends. There’s three ways to use dividends, and they all take into account a person’s preference towards rewards. One can either reinvest all the dividends earned, partially reinvest dividends while still cashing out the rest, or simply cash out and run. Freedom of choice is beautiful, isn’t it?

Why will your future self thank you?

Loyalty, gain, investments. DRIP's have it all, and because of that are an interesting investment to consider. BITS and DRIP's have a few things in common. To begin with, they both are plans which help investors look at the long term gain instead of the immediate reward. Although getting some cash on your investment sounds like a good deal, reinvesting the dividend will most probably yield much higher returns. Similarly, in the case of loyalty programs, getting a freebie or discount makes one feel like their purchases were worth something more. But in the long term these freebies do not actually benefit the customer. For this reason, here at BITS we have been rethinking rewards, so that they last into the future.

Extra bits:

  1. Urban Dictionary definition of “drip”: an adjective that describes a dope outfit

2. What’s the record for the highest evaluation in history? It’s Apple

3. Dividends don’t just appear. They need to be paid out of a company’s profit