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.

  1. What is a DRIP?

    The word "DRIP" is an acronym for "dividend reinvestment plan", but "DRIP" also happens to describe the way the plan works. ... Read Answer >>
  2. How are dividends usually paid out?

    Discover the two compensation methods commonly used by companies and mutual funds to make dividend payments on equity investments. Read Answer >>
  3. How can I purchase stocks directly from a company?

    There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some ... Read Answer >>
  4. Is a Canadian resident allowed to participate in a direct stock purchase plan from ...

    There is no law that prevents Canadians from participating in direct stock purchase plans offered by U.S. companies. There ... Read Answer >>
Related Articles
  1. Investing

    The Perks Of Dividend Reinvestment Plans

    These plans offer shareholders a way to directly invest in some of the top companies without the commissions.
  2. Investing

    How Does a Dividend Reinvestment Plan Work?

    A dividend reinvestment plan allows investors to use their dividends to purchase more shares of the corporation’s stock, rather than receiving payment.
  3. Investing

    6 Reasons Why Dividends Should Be Reinvested

    Learn about the advantages of dividend reinvestment programs and how they may benefit longer-term investors who want to build a position in a company.
  4. Investing

    5 Ways to Lose Money With a Dividend Reinvestment Plan

    Enrolling in a dividend reinvestment plan can backfire if you're not using it wisely, costing you money in the process.
  5. Investing

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  6. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  7. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  8. Investing

    Got Dividends? Here's How to Reinvest Them

    Reinvesting dividends is almost always a good idea if you intend to hold your shares for the long term, and there are several ways to do it.
  9. Investing

    Reinvesting Your Mutual Fund Dividends

    Learn the benefits of reinvesting your mutual fund dividends, their impact over time, and when it is better to take the dividend payments as cash.
  1. Dividend Reinvestment Plan - DRIP

    A plan offered by a corporation that allows investors to reinvest ...
  2. Treasury DRIP

    A dividend reinvestment plan that uses dividends to purchase ...
  3. Drip Marketing

    A strategy employed by many direct marketers where a constant ...
  4. Distribution Reinvestment

    A process whereby the distribution from a limited partnership, ...
  5. Drip Pricing

    A pricing technique in which only part of a product or service’s ...
  6. Systematic Investment Plan - SIP

    This is a plan where investors make regular, equal payments into ...
Hot Definitions
  1. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  2. Nest Egg

    A substantial sum of money that has been saved or invested for a specific purpose. A nest egg is generally earmarked for ...
  3. Denial Of Service Attack (DoS)

    An intentional cyberattack carried out on networks, websites and online resources in order to restrict access to its legitimate ...
  4. Perkins Loan

    A loan program that provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional ...
  5. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  6. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
Trading Center