What is a Dividend Reinvestment Plan?
Terms of Use: A dividend reinvestment plan provides for the automatic reinvestment of cash dividends to be used to purchase additional shares of the company’s stock or mutual fund shares. By taking advantage of automatic reinvestment, shareholders can obtain the advantages of cost averaging. The same dollars buy more shares when the price is low, so the average cost per share is lower than the average price per share at each purchase date.
Dividend Reinvestment Plans typically allow for automatic reinvestment of equity back into the underlying company. This method allows investors to keep their investments growing, with no out of pocket cash requirements. And, no brokerage fees apply with automatic Dividend Reinvestment Plans. Investors still must pay applicable taxes on any dividends earned, whether recieved as cash dividends or reinvested back into the company stock. One of the negative side-effects of Dividend Reinvestment Plans is the need for the investor to keep accurate records of cost-basis for all the “pieces” of stock shares that are purchased with equity. Since the periodic dividends are typically not enough to purchase complete stock shares, fractions of shares are purchased.
A dividend reinvestment plan is an excellent way to “play the market.” These investment plans are often referred to as a DRIP or DRP. The acronym also implies “dripping,” or slowly increase your position in a particular stock. Many companies offer a dividend reinvestment plan as a means of purchasing additional shares of their stock. This allows the shareholders to purchase stock without going through a broker. In most cases, by buying directly from the company, it also eliminates the commission or stock purchase fee. The companies that offer the dividend reinvestment plan have several different options available. Some offer an automatic reinvestment of the dividends received. These are usually offered every quarter as the dividends are paid. Other options offer a monthly purchase of additional stock or an on-demand purchase. In most cases, the stock will be offered from 1% to 10% lower than the current market price. Another advantage of a dividend reinvestment plan is that you can inv
