When you invest in dividend-paying stocks, most brokers offer the ability to enroll in a dividend reinvestment plan, or DRIP. A DRIP will take the dividends paid by your stocks and automatically reinvest them in additional shares of the same company. So if one of my stocks pays me $50 in dividends and trades for $25 per share, my dividend payment would be used to purchase two more shares of the stock instead of it being paid to me in cash.
Real estate investment trusts (REITs) are known for above-average dividends. So are they good candidates for DRIP investing?
Some big perks of DRIP investing aren't very important anymore
For most of modern history, there were two big reasons to enroll dividend stocks in a DRIP. First, DRIP investing is and has been commission-free, even before that was really a thing in the brokerage industry. If you had $100 in dividends automatically reinvested, it didn't cost you a penny in commission. Obviously, now that every major online broker doesn't charge stock trading commissions, this isn't a big deal anymore.
Second, DRIP investing lets you buy fractional shares, putting your entire dividend to work. If you get a $100 dividend payment and a stock is trading for $40, it would be used to buy 2.5 shares. Some (but not all) brokers now allow investors to buy fractional shares directly, so this benefit isn't quite as valuable as it used to be.
Advantages of DRIP investing
There are still some good reasons to enroll in a DRIP. First off, if your broker doesn't offer fractional shares, being able to put your entire dividend to work is still a perk.
In addition, there's value in automation. If my goal is to reinvest my dividends to compound my REIT investments over time, without a DRIP I have to log into my brokerage account and manually reinvest the dividends I receive from each REIT investment every quarter (or monthly, in some cases). Automating the process saves time and eliminates the need to remember what dates my dividends arrive.
Drawbacks of DRIP investing
Now that I've covered the reasons for investing through a DRIP, there are two big reasons you might want to think twice.
First, if your REITs are owned in a taxable brokerage account, you may still owe dividend taxes on your reinvested dividends. In other words, if you receive $1,000 in dividends this year and use a DRIP to reinvest that entire amount, the IRS will still treat it as if you had received $1,000 in cash dividends.
Second, DRIP investing isn't necessarily ideal for investors who like to be opportunistic. Think of this situation: If you own 30 different dividend stocks that each pay you $50 per quarter, a DRIP would invest each $50 payment right back into the stock that paid the dividend. On the other hand, if you weren't enrolled in a DRIP, you'd be free to invest all $1,500 in dividend income however you see fit. If one particular REIT looked especially attractive, you could choose to invest all of your dividend income in it.
In addition to these two reasons, a DRIP is obviously not a great idea if you depend on your REITs for current income.
What do I do with my REIT investments?
In full disclosure, all of the REITs I own -- in my taxable brokerage account as well as in my retirement account -- are enrolled in a DRIP. There are two reasons I'm sticking with a DRIP (for now). First, my broker hasn't started offering fractional share investing yet. When they do, I may rethink my DRIP investing, particularly in my taxable account. And second, I'm a big fan of automating as much of my financial life as possible. I like automatic transfers into my emergency fund, for example, and automatic contributions to my retirement account. And with a DRIP, I like automatically compounding my investment returns.