Dividend Reinvestment Plan - DRIP

Loading the player...

What is a 'Dividend Reinvestment Plan - DRIP'

A dividend reinvestment plan (DRIP) is offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date. A DRIP is an excellent way to increase the value of an investment. Most DRIPs allow investors to buy shares commission-free and at a significant discount to the current share price, and do not allow reinvestments much lower than $10. This term is sometimes abbreviated as "DRP."

BREAKING DOWN 'Dividend Reinvestment Plan - DRIP'

Normally, when dividends are paid, they are received by shareholders as a check or a direct deposit into their bank account. As of 2016, many companies offer shareholders the option of reinvesting the amount of the dividend by purchasing additional shares through a DRIP. Because shares purchased through a DRIP typically come from the company’s own reserve, they are not marketable through the stock exchanges. Shares must be redeemed directly through the company. If a company does not offer a DRIP, one can be set up through a brokerage firm. Many brokers allow dividend payments to be reinvested in the shares of any stock held in an investment account. Although the dividends are not actually received by the shareholder, they still need to be reported as taxable income.

Shareholder Advantages

There are several advantages of purchasing shares through a DRIP. DRIPS offer shareholders a way to accumulate more shares without having to pay 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 owning the shares can be significantly lower than if the shares were purchased on the open market. Long term, the biggest advantage is the effect of automatic reinvestment on the compounding of returns. When dividends are increased, shareholders receive an increasing amount on each share they own, which can also purchase a larger number of shares. Over time, this increases the total return potential of the investment. Because more shares can be purchased whenever the stock price decreases, the long-term potential for bigger gains is increased.

Company Advantages

Dividend-paying companies also benefit from DRIPs in a couple of ways. First, when shares are purchased from the company for a DRIP, it creates more capital for the company to use. Second, shareholders who participate in a DRIP are less likely to sell their shares when the stock market declines. One reason is the shares are not as liquid as shares purchased on the open market. Another reason is DRIP participants can more easily recognize the role their dividends play in the long-term growth of their investment.

RELATED TERMS
  1. Treasury DRIP

    A dividend reinvestment plan that uses dividends to purchase ...
  2. Reinvestment

    Using dividends, interest and capital gains earned in an investment ...
  3. Distribution Reinvestment

    A process whereby the distribution from a limited partnership, ...
  4. SEC Form S-3D

    A filing that publicly-traded companies must submit to the SEC's ...
  5. Accumulating Shares

    Common stock given to current shareholders of a company in place ...
  6. Drip Marketing

    A strategy employed by many direct marketers where a constant ...
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. Retirement

    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.
  3. 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.
  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. 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.
  6. ETFs & Mutual Funds

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  7. 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.
  8. Financial Advisor

    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. ETFs & Mutual Funds

    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.
  10. Financial Advisor

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
RELATED FAQS
  1. How do I deal with stocks that pay dividend on a monthly basis?

    If I own 1,000 shares of company ABC, which yields $.50 per share. That would equal to $500. So, my qu... Read Answer >>
  2. What effect does a company's dividend reinvestment plan have on its stock price? ...

    When a dividend is received, an investor has two options: to keep the proceeds in a bank account or reinvest them. For the ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What's the smallest number of shares of stock that I can buy?

    The answer to this question is not as straightforward as it seems. Many people would say that the smallest number of shares ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center