There is a more indepth explanation at the Motley Fool site:
However, they don't want to be nibbled to death by tiny little duck accounts, since there are fees associated with keeping track of your account, how much stock you own, and what dividend you are due. That is why you either make an upfront buy of some amount like $500-$1000, then set up automatic deduction from your checking account (or other place) for $75 a month or whatever smaller amount you can invest. The good thing about doing small, monthly investments is dollar cost averaging. When the stock's price per share is high, you get less stock automatically for your $75 monthly amount. When the stock's price has fallen somewhat, your $75 goes further - so you wind up buying at a lower, time-averaged out price usually.
Now a few DRIP programs from a few companies pay the fees for purchasing, the fees for tracking and the fees for selling. Not very many do all of that, but there are maybe a handful. Most will charge at least a modest (far more modest than a broker's comission) fee for selling your stock, when you eventually choose to get out of it. Some will charge a few pennies per stock overhead fees. It all depends on which company and what their program rules are. Some companies (Johnson and Johnson) require you to own a share in your own name (NOT through a broker) before you can enter their DRIP program. Since getting title to the stock transferred to your own name is such a hassle and so expensive, I've never bothered - despite the fact I'd love to invest in JNJ if they didn't make it so hard.
These are stocks, so all the usual caveats apply. You can lose value, if the company's stock price falls. You can lose it all if the company goes bankrupt.
After doing a fair bit of research to locate companies that paid most of the fees, I invested in Lehman (LEH), a water utility (WTR), and Exxon-Mobil (XOM). I would like to find two others, which is why I found out the catch in JNJ's DRIP. I'm still looking. I did initially place $1000 into the LEH - back when it was around $60 a share, so it has done REALLY well. I put $500 into WTR, which has shown slight profit - but gone sideways since, so it isn't producing much return - I'm in it primarily for the dividend accumulation and (hopefully) less volatility because it is a utility. After plunking down all that change (plus the additional $125 a month auto-buy in LEH, and $75 for WTR - which allowed me to pick which day the deduction was made from my checking), I didn't have a big chunk left to up-front buy on the Exxon-Mobil - so I went the purchase-small-and-long route, putting in $75 a month for at least 10 months, I think it was.
The hardest part about investing in DRIPS is that the dividends - even if reinvested (and they SHOULD be reinvested, that's the point!) - are taxable. So, you have to painstakingly keep track of all those little dollar amounts from each program every 3 months, to make sure you report your dividend income properly for your taxes. I'm tracking it by laborious data entry unto Yahoo's Finance Portfolio manager; there are better software packages available that track better and more detailed profit data. I'm just not 'big' enough yet to need to spend $50 or so to buy one.
So, here are the juicy and exact details:
LEH and WTR began in June, 2006. XOM began in July, 2006.
Currently, as of today, value $3738.16, gain of $554.30 over original monies invested for a non-annualized rate of return of 17.39%.
That 17.39% is high because the market is up today; it has been as low as 9.64% over the months I've been tracking my portfolio. It has also been as high as 19% - though that was only for a few hours. However, even the 9.64% annualized is 19.28%. That is a far cry better than I am doing with a three-month CD right now, with an annualized return of only 5.25%
So why do I have not only one CD, but six, each at a $1000, with three due out in March and another three due out in April? Because that is my Emergency Fund money, so I can't take a chance that it might disappear in a stock market correction, or that I might have to sell out the stock at a bad, cheap price just because I had to have the Emergency money. Since I try to keep about $3000 in the checking account (overdraft padding), I have enough there to live on in Emergency mode (e.g. the job suddenly lays me off, which isn't likely right now, but...pays to be prepared) until March when the CD pops free to deliver more Emergency fundage - plus the interest. It's more work than just having a ING savings account - but that extra 5.25% - 4.70% = 0.55% is my pay for that time spent.
Now, a question out to anyone still reading. Should I fund up a ROTH IRA instead of doing CDs to handle the Emergency fundage monies this year? I've heard the original contributions can be taken out at any time, for any reason - only the interest earned has to stay in like a regular IRA. The idea I can have my money when I retire WITHOUT paying taxes on it - because they were already paid - is VERY appealing to me.