Introduction

This article is not even near completion; however, a few people noticed it in the blog line-up and asked for a preview.  So, I have decided to publish it early, but it will be updated pretty regularly over the next six to eight months.

Introduction to DRIPs 

DRIPS are dividend reinvestment plans, whereby some or all of a cash payment is reinvested as shares of common stock.  They allow investors to benefit from a compounding effect: earning dividends on previously issued dividends.  The advantages and disadvantages of DRIP programs are discussed later.  The process of how to set up a DRIP directly with a company; that is, without using a brokerage service, is also described.

Introduction

The first question that someone might ask is "what is a dividend"?  A dividend is usually cash paid to a shareholder.  There are other types of dividends (companies could give more shares, even transfer tangible property to shareholders), but for the purposes of this discussion, we'll stick to cold hard cash.

Introduction 

The PE ratio is one of the more commonly available pieces of information about a publicly traded company.  The calculation is simple: it's the share price divided by the annual earnings per share.  In a sense, the PE ratio is a way to normalize the price of a company to its earnings and allows a person to compare one company with another.  For example, if company ABC is trading at $50 a share and generates $5 in earnings in a 12-month period, it has a PE ratio of 10 (50 ÷ 5 = 10), while company XYZ is trading at $18 a share, but produces only $1 a share in earnings, it has a PE ratio of 18 (18 ÷ 1 = 18), if the companies are very similiar, at first blush you might say that ABC is trading at a better value than is XYZ, of course more analysis is needed, but this result alone should convince a person to investigate further to see if this difference is warranted.  This issue will be touched on later and discussed in more detail in another blog.