What effect does a company's dividend reinvestment plan have on its stock price?

A:

When a dividend is received, an investor has two options: to keep the proceeds in a bank account or reinvest them. For the latter option, an investor can use a dividend reinvestment plan (DRIP).

DRIPS are provided by both companies themselves and brokerage accounts. There are a few differences between both types of plans. Company-operated DRIPS often place restrictions on when investors can purchase shares, while a brokerage-run account allows purchases at any time. The reason for this difference arises from how the stocks are purchased.

With a company-operated DRIP, the shares are issued from the company's own reserve of shares. When investors want to sell any shares purchased through a DRIP, they can only sell them back to the company. For this reason, a DRIP that is operated by the company itself does not affect the stock price of the shares in the market.

Conversely, a DRIP operated by a brokerage account purchases its shares directly through the secondary market. Because these shares are both bought and sold at market prices, a brokerage-operated DRIP will have the same effect on stock prices as a normal buy or sell transaction in the open market.

To learn more, see The Perks Of Dividend Reinvestment Plans, How And Why Do Companies Pay Dividends? and The Importance Of Dividends.

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