A dividend reinvestment plan (DRIP) is an investment program where instead of receiving quarterly cash dividend distributions from a company, you will buy more shares of the underlying company to increase your position in the stock. Note that the investor still has to pay taxes on the dividends received, even though he did not receive cash distributions. This program allows the investor to take advantage of stock price appreciation (as he buys more shares) as well as power of compounding growth from the dividend returns. All this can be done without incurring additional stock brokerage fees of purchasing additional shares.
Note: Be aware that some DRIP programs do charge fees, so be sure to ask what type of fees & commissions you will be paying, if any.
Advantages of Dividend Reinvestment Program
Most companies will permit you to buy additional shares of their stock through a dividend reinvestment program without incurring additional brokerage charges. This is also known as Optional Cash Purchase Plan (OCP).
Further to buying additional shares, 100s of companies will allow you to purchase more stock at discounted prices to market value of shares; the discount could range between 1% – 10%. This allows investors to make an instant return on their investment, and also allows them to offset any additional brokerage charges they may incur by purchasing more shares.
Investors buying shares through a dividend reinvestment program are buying for the long term because they buy shares regularly (some even monthly) and hold on to that stock for the long term.
Types of Dividend Reinvestment Plans
Run by Company – These types of DRIPS are administered and run by the company issuing its shares to the general public. Their DRIPs are run through corporate headquarters and some companies even off their 401k plans or Individual Retirement Accounts (IRAs) through DRIP programs.
DRIP Administrators – Some companies that do not have the expertise to run dividend reinvestment programs hire DRIP agents or financial institutions who do all the paperwork and administrative work for them. Examples of such DRIP agents include Bank of New York, Boston Equiserve, First Chicago Trust Company, First Union Central Bank, SunTrust banks, Wells Fargo ShareOwner Services and others. Go here to view a full list of DRIP administrators.
Brokerage Companies – Sometimes even your normal stock brokerage may offer such services at no additional charges or a flat low fee, be sure to ask.
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