SmartMoney Blogs

Ask SmartMoney
Your personal finance questions, answered.

Are Dividend-Reinvestment Plans Risky?

Question: How risky are dividend-reinvestment plans? Are they an easy way to start investing on my own, outside of my 401(k)?

– Jacob Shaw, Duluth, Minn.

Answer: Nothing’s risk-free, but advocates of DRIPs—which let you invest directly in individual companies without a broker—like that the plans encourage disciplined, long-term investing. (More than 900 U.S. firms currently offer them.) Designed to automatically reinvest dividends back into a firm’s stock, DRIPs help reduce the hazards—and heartburn—of market volatility, because you buy more shares when the price is low and fewer when it’s high. One cautionary note, says Michael Kalscheur, a senior financial consultant with Castle Wealth Advisors in Indianapolis: Such continual reinvesting can lead to overconcentration in a single stock. Also, the DIY nature of these plans can mean a drip, drip, drip of paperwork for those who invest in several stocks.

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (0)

    • Be the first to leave a comment on this blog.

About Ask SmartMoney

  • Ask SmartMoney has a single, simple mission: Answer your questions. Answers are written by the staff of SmartMoney.com and SmartMoney magazine, with the help of outside experts. Topics cover investing, spending, retirement planning, saving for college, insurance, taxes and more. Submit your question in the form below, or email ask@smartmoney.com.