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In the late 1990s - when Internet stocks were tripling overnight and dividend stocks were about as popular as a proctology exam - it was tough to drum up much interest in dividend reinvestment plans. Indeed, the "slow-and-steady" approach to investing didn't have nearly the sex appeal as the "get-rich-over-night" mentality that pervaded Wall Street and Main Street.

My, how things have changed in the last 30 months.

In 1999, for example, dividend-paying stocks lagged non-payers by nearly 90 percentage points, according to Standard & Poor's. However, since the tech sector began imploding in 2000, dividend payers have beaten the rest of the market by some 44 percentage points.

There are two types of DRIPs:

-- Traditional DRIPs require an investor to own at least one share of stock, and to have that share registered in the name of the investor (not in street name) in order to be eligible. These are a bit more difficult to enroll in since you need to be a shareholder first before joining the plan.

-- Direct-purchase DRIPs allow you to make even your initial investment directly. Thus, you can go to these companies and buy stock directly, the first share and every share. There are approximately 600 U.S. companies (and foreign companies with U.S.-traded American depositary receipts) that allow investors to buy stock directly, the first share and every share. Minimum initial investment in more than half of these plans is $250 or less. These plans offer the easiest way to invest in DRIPs.

DRIP advantages

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DRIPs offer an excellent vehicle for any investor -- regardless of the size of his or her pocketbook -- to participate in in good, high-quality stocks. Often individuals with little investment dollars feel they can invest only in very low-priced stocks, but DRIPs provide an avenue through which you can buy many quality stocks that may trade at higher prices. That's because DRIPs allow investors to buy stock in two ways: via reinvested dividends; and what are called "optional cash investments." These investments, in many cases, may be as little as $25 or $50. Thus, even if your optional investment is not enough to buy a full share of stock, the DRIP will buy you a fractional share of stock that is entitled to a fractional part of the dividend. Thus, you can literally buy stocks "on the installment plan," if you will.

Dividend reinvestment plans offer a very low-cost and, in many cases, no-cost way to invest. Many DRIPs charge no fees on the buy side, and those that do charge usually have very modest fees -- $1 to $5 per purchase. The fact that you can invest in a low-cost way is especially important during difficult market periods, when transaction costs can have a huge impact on a portfolio that is getting worked over by declining markets.

DRIPs provide an excellent way for an investor to "tip-toe" back into difficult markets. I think all of us know that you should be a buyer during down markets; after all, that is when stocks are on sale. However, knowing you should buy and actually buying can be difficult when stocks are eroding. DRIPs provide a palatable way to get back into the market because the investment amounts are usually not very big. Thus, while you may feel exposed investing , say, $10,000 or $20,000 in a difficult market, it is a lot easy to invest $500 or $1000. DRIPs allow you to do that in a cost-effective and efficient way.

Because you are buying stock at least quarterly with reinvested dividends, and more often if you choose with optional cash investments, DRIPs provide excellent vehicles for maintaining a regular investment program. That is key for long-term investors: to have an investment program set up that is on "auto-pilot." DRIPs provide such a vehicle.

In roughly 8 percent of the roughly 1,000 DRIP programs, you can buy stock at a discount to the market price via the DRIP. These discounts, which range from 2 percent to 5 percent, usually apply only to reinvested dividends. However, some companies will apply the discount to shares purchased with optional cash investments as well.

DRIP disadvantages

These are not programs geared for trading. Most DRIPs buy stock once a week or once a month. Thus, if you are trying to get in and out of stock quickly, you won't be able to do that with DRIPs. Thus, these plans are geared more for buying and accumulating stocks (i.e. a buy-and-hold approach).

Since you are dealing directly with the company, you will not have a consolidated statement showing all of your DRIPs (as you would, say, with investments at the broker). Thus, if you own 10 DRIP companies, you'll receive 10 different quarterly statements. This may require a bit more record-keeping discipline on the part of the investor, especially when it comes to keeping track of the cost basis of your investments.

What stocks are best suited for DRIPs?

The universe of DRIPs is dominated by larger-cap companies, so you'll need to feel comfortable owning large-cap stocks. Sstocks best suited for DRIPs are those in which you feel most comfortable implementing a long-term, buy-and-hold strategy. In this way, you can take advantage of the ease of buying stock on a regular basis that the plans provide. Also, companies with rising dividend streams make good DRIPs because that rising dividend stream buys you more shares over a longer period of time.

Pocketing the dividends and buying something else is really a portfolio diversification decision, but if you don't plan to take advantage of the dividend reinvestment feature of a DRIP, you are not taking advantage of one of the biggest benefits of the plan. Thus, I would not recommend simply making a one-time purchase of a stock in a DRIP and not reinvesting the dividends. Now, there are plans that allow you to reinvest partial dividends. Such plans may be attractive for investors who, over time, may need to receive more dividends to supplement their cash flow. However, if an investor is in the wealth-building phase, you should be using DRIPs to accumulate shares, which means you should be reinvesting dividends and making optional investments whenever possible.

DRIP revival

That dividend stocks are back in vogue is one reason investor interest in DRIPs has rekindled. Other factors that have caused a resurgence in DRIP investing include:

• A return to conservative investing styles. If the last 30 months have taught investors anything, it is that this whole investing game is not as easy as the late '90s would have had us believe. The market is still a great place to make money, but the race is not a sprint, but a marathon. Within the context of a renewed focus on long-term investing, the DRIP style of investing has huge appeal.
  
• The importance of asset and time diversification. Perhaps the biggest mistake investors made in recent years was the lack of diversification in their portfolios. Diversification is important on two fronts - asset diversification (that is, diversifying your investments across a broad number of holdings) and time diversification (spreading out your investments over time). Fortunately, DRIP investing lends itself perfectly to both asset and time diversification.
  
• A disdain for brokers and Wall Street institutions. Many investors have been turned off by the advice (and performance) they received from brokerage firms and mutual funds. In addition, news of conflicted analysts and other monkey business at investment banks and brokerage firms hasn't exactly enhanced the credibility of Wall Street in the eyes of many individual investors. In such an environment of cynicism and skepticism toward Wall Street, more investors are looking for ways to "go it alone." DRIP investing provides an attractive way for investors to deal directly with companies, avoiding Wall Street and its middlemen.
  
• The prospects for more favorable tax treatment for dividends. One development that would provide a huge boost to dividend stocks (and, therefore, DRIPs) is the possibility of more favorable tax treatment for dividends. Currently, dividends are taxed twice; first, at the corporate level (as profits); and second, at the individual investor level (as dividend income). Among the ideas being floated around Washington these days is a reduction in the double taxation of dividends. Obviously, if dividend income received better tax treatment, stocks paying dividends would likely receive a boost.
  

What does all this mean for DRIP investors? Simple. If investors are more interested in the DRIP style of investing, that means more money will flow into DRIP stocks, driving their prices higher.

And that's good news for you and me.