A dividend reinvestment plan, commonly referred to as a DRIP, is an equity investment option that some companies offer to their shareholders.
How Dividend Reinvestment Plans Work
If an investor enrolls in a dividend reinvestment plan, he or she will not receive a cash payout of their dividend. Instead, the dividend is used directly to purchase more shares and is reinvested in the company. The best way to find a dividend reinvestment plan is to visit company websites and see if they offer such an option.
Types of Dividend Reinvestment Plans
There are three kinds of DRIPs:
· Company-run: Many companies run their own DRIPs. These allow stockholders to enroll directly with the company.
· Transfer agent-run: Transfer agents are third parties, hired by companies to run their dividend investment programs. Transfer agents are often cheaper than buying from the company directly.
· Brokerage-run: Brokerage-run DRIPs let shareholders reinvest their dividends, even if the company has no formal reinvestment plan. In such cases, there is normally no cost
associated with reinvesting dividends.
Benefits of DRIPs
Enrolling in a dividend reinvestment plan is easy. The paperwork involved is minimal and can be completed quickly. It also doesn’t require a lot of money. Even owning just one share is enough to take advantage of this investment method. At the same time, investors can choose to receive cash dividends on a certain percentage of their stock and enroll in a DRIP with the remaining amount.
Normally, dividends that are paid out in cash are either spent or reinvested. However, when reinvesting the cash, investors must often pay transaction fees. These do not occur when the dividend is reinvested directly. Being part of a DRIP plan often allows investors to purchase more stock at a reduced rate and with no transaction fees. This is something many corporations offer to their stockholders.
Stockholders reinvest on a regular basis thanks to their DRIPs. The reinvestment process is automated, so they buy shares without having to take any action. Furthermore, fractional shares can be purchased using this method. Over time, this can lead to a significant increase in wealth.
Summary on DRIPs
Unless you desperately need the money, DRIPs are a good way of investing a small amount of money and to continue investing at regular intervals. Investors avoid brokerage commissions, which often eat up a good amount of the dividend. If investors are patient, it is a great way to grow money in the long term.
