Dividend Reinvestment Plan (DRIP)

What Is a Dividend Reinvestment Plan (DRIP)?

A dividend reinvestment plan (DRIP) is a program that permits investors to reinvest their cash dividends into extra shares or fractional shares of the underlying stock on the dividend payment date. Albeit the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally alludes to a conventional program offered by a publicly traded corporation to existing shareholders. Around 650 companies and 500 closed-end funds currently do as such.

Understanding a Dividend Reinvestment Plan (DRIP)

Regularly, when dividends are paid, they are received by shareholders as a check or a direct deposit into their bank account. DRIPs, which are otherwise called dividend reinvestment programs, provide shareholders with the option of reinvesting the amount of a declared dividend into extra shares, which are bought directly from the company. Since shares purchased through a DRIP regularly come from the company's own reserve, they are not marketable through stock exchanges. Shares must be recovered directly through the company, too.

Most DRIPs permit investors to buy shares without commission or for a nominal fee, and at a critical discount to the current share price; they might set dollar essentials. Be that as it may, most don't permit reinvestments much lower than $10. While DRIPs are typically intended for existing shareholders, a few companies really do make them accessible to new investors, for the most part indicating a base purchase amount.

Albeit the shareholder doesn't really receive the reinvested dividends, they actually should be reported as taxable income (unless they are held in a tax-advantaged account, similar to an IRA).

While most DRIPs utilize the cash proceeds from dividends to purchase extra shares, more complex methods can happen assuming that the actual dividend is allowed in stock in lieu of cash.

Extra Considerations for DRIPs

There are several advantages of purchasing shares through a DRIP, for both the company giving the shares and the shareholder.

Advantages for the Investor

DRIPs offer shareholders a method for accumulating more shares without paying a commission. Many companies offer shares at a discount through their DRIP from 1% to 10% off the current share price. Between no commissions and a price discount, the cost basis for claiming the shares can be essentially lower than if the shares were purchased on the open market. Through DRIPs, investors can likewise buy fractional shares, so every dividend dollar is truly going to work.

Long term, the greatest advantage is the effect of automatic reinvestment on the compounding of returns. At the point when dividends are increased, shareholders receive a rising amount on each share they own, which can likewise purchase a bigger number of shares. Over the long haul, this builds the total return capability of the investment. Since additional shares can be purchased at whatever point the stock price diminishes, the long-term potential for greater gains is increased.

Advantages for the Company

Dividend-paying companies likewise benefit from DRIPs in several different ways. To begin with, when shares are purchased from the company for a DRIP, it makes more capital for the company to utilize. Second, shareholders who take part in a DRIP are less inclined to sell their shares when the stock market declines. Mostly that is on the grounds that participants tend to be long-term investors and perceive the job their dividends play in the long-term growth of their portfolios. Of course, another factor is that DRIP-purchased shares are not so liquid as shares purchased on the open market — they must be reclaimed by means of the company.

Most DRIPs, like the one examined here, are sponsored by a company (issue-sponsored) through their transfer agent, who holds the shares. Note that a few brokerages permit customers to partake in a transfer agent DRIP while keeping the shares at the brokerage firm. In a broker-sponsored DRIP, the broker buys the share utilizing the dividend proceeds in the open market.

Certifiable Example of a DRIP

The 3M company offers a DRIP program. Administered by the company's transfer agent, EQ Shareowner Services, it provides registered shareholders with the option of utilizing all or a portion of their dividends (designated either by dollar percentage or by number of shares) to buy shares; in the event that they don't pick an option when they sign up for the plan, every one of their dividends will be reinvested. The company pays all fees and commissions.

Features

• Note that dividends paid into DRIPs are taxed as ordinary dividends even however they are utilized to purchase shares.
• This strategy permits investors to compound their returns over the long haul by accumulating more shares, which themselves pay dividends that will be reinvested.
• A dividend reinvestment plan, or DRIP, automatically utilizes the proceeds created from dividend stocks to purchase more shares of the company.