The youthful investor has many limiting factors in their investing pursuits. For example, the youthful investor is often working with a smaller capital base than other investors. Similarly, expenses are rather high compared to earnings, especially for students. In addition, many are limited on time due to school, dating, sports, work, etc.
All of these factors make Dividend Reinvestment Plans DRIPs and Direct Stock Purchase Plans DSP useful for the youthful investor.
The DSP plan allow the youthful investor to purchase one time initial investments in the company or fund with the option of further investments eliminating the need of a broker and their expenses. A DRIP plan will allow the youthful investor to reinvest dividends automatically. This ingrains the principal of compound interest at an early age and is a wonderful technique to grow shares and earnings over time.
A pillar of DRIP and DSP investing is that usually the companies that offer it are the blue chips of the United States, Canada, and Europe. Companies like Disney, Verizon, Proctor and Gamble, Walmart, Ford, General Electric, etc. These are often companies that have been around for a while and compose just about every sector of the market. Similarly, these are mostly safe long term investments for the youthful investor, weeding out any attempted speculation. Thankfully, though, there are a handful of more speculative small cap and even international emerging options for the youthful investor to research and invest in with similar programs.
Although the DRIP and the DSP programs may seem like the holy grail of investing, there are a few catches to look out for. Most important, these strategies are often buy and hold, or better yet, do homework and hold. When purchasing direct, the shares are not necessarily purchased that day or week, each is different and must be investigated. The same is true when the time to sell comes.
Like brokerage accounts, DRIPs and DSP plans often incur fees. Many plans have a small one time set up fee as well as an optional additional cash purchase fee. These and batch sale or market sale fees can eat up at your profits. Some even charge to reinvest dividends!
However, after doing their homework the youthful investor can navigate through the mess and find the best plans for themselves. In a later post I will highlight not only the best DRIPs and DSP plans but also the ones with the lowest initial investments, lowest optional cash purchases, and the best bunch, which have no fees at all!