Dividend Reinvestment Plan (DRIP) Good Investment or Not?

Dividend Reinvestment Plan, also known as DRIP, is a way for investors, shareholders and employees to reinvest the dividend back into the company’s shares. Most shareholders utilize this strategy for solid, stable company such as Pfizer, AT&T and Chevron. There are tons of companies that provide this strategy for investors (majority of DRIP stocks can be purchased on ComputerShare but a small handful of companies have their own internal agent). Through my example, let’s assume Pfizer stock price currently sits at $32.00 with an annual dividend yield of 2.50% (this will vary with the fluctuation of the stock price as dividend yield is annual dividend/stock price) and an annualized stock price appreciation of 5%. 5% annual appreciation is barely on par with the S&P500 annualized return of ~8%. Thus, in reality the dividend and share value will be enhanced or diminished. My analysis did not take capital gain taxes and inflation into consideration.

Let’s take a look at Year 1 and 2 dividend and share value with and without DRIP. With DRIP in place on a $10,000 upfront investment, Pfizer will $250 and $269 in dividend. Without a DRIP Plan, Pfizer will also pay $250 in Year 1 but will pay a little less dividend (b/c you own less shares) at $263. While the $6 difference might seem minuscule, but DRIP will compound the return a few years down the road. As you can see, you will make $3481 more by doing nothing. In reality, solid, stable companies will usually aim to increase their dividend (absolute term) annually, thus the realized return will actually be greater. However, please note that companies themselves/external agents usually charge an excessive fee to purchase and sell these shares in batches. Market fluctuation and industry-specific issues (Pfizer and other pharma are going through the patent cliff in 2015-2017) are not taken into consideration. Overall, DRIP is a good investment with companies that have solid, stable earnings (thus stock price) and pays stable (annual incremental is even better) dividend.