The main disadvantage of DRIPs is the lack of diversification, since almost all DRIPs are offered by blue-chip companies.
With DRIPs, all the money is invested in the stock, whereas in buying securities in the market, there may be some transaction costs, and may be higher for odd lots (less than 100 shares) and since only whole shares can be purchased, there will be some money left over, unless the share price happened to be an exact multiple of the constant dollar amount allotted by the investor.
Furthermore, all the dividends can be reinvested automatically if the investor desires. There are no transaction penalties for buying less than a round lot of shares (100 shares) and can even be purchased in fractional amounts.
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With dollar-cost averaging, more shares are bought at a lower price, when the market is down, than at a higher price, when the market is up.ĭollar-cost averaging can be combined with dividend reinvestment plans ( DRIPs), offered by many blue-chip companies, where the investor can buy company stock directly from the company, free of transaction costs. This technique can be used for specific securities or for securities covering a larger swath of the market, such as exchange-traded funds or mutual funds. Dollar-cost averaging is a passive investment plan that invests a constant dollar amount per unit of time, such as a month, taking advantage of the natural fluctuations of market prices over time.
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