Dividend Reinvestment Plans

You rarely get something for nothing, particularly when it comes to buying stocks. But one exception is the dividend reinvestment plan. It lets you buy shares without paying a broker's commission and sometimes at a discount price.

When you buy stock in certain companies, they offer you these reinvestment programs. They automatically let you use your stock dividends to buy more shares in the company free of a brokerage commission. Almost 1,000 companies have reinvestment plans. Better yet, more than 40 of them also give you discounts on the price of the stock. Discounts generally amount to 3% to 5%. However, Acme Electric and First Connecticut SBIC give their investors 10% off the market price.

Once you are on record as a shareholder, you simply sign a form authorizing the company to put all of your dividends in additional shares. For example, if you reinvest $ 100 of dividends in a company that also offers a 5% discount, you get $105 worth of stock. When you don't have enough to buy a full share, the company credits you with a fractional share. You also can buy additional shares for cash, thus sidestepping a broker's commission.

In short, dividend reinvestment is an easy, money saving way to build up more stock. A good broker can give you the names of companies that offer reinvestment plans.