What Is Distribution Reinvestment?
Distribution reinvestment is a process whereby the distribution from a pooled investment trust is automatically reinvested in the trust. Distributions from limited partnerships like real estate investment trusts (REITs) or other pooled investments are often reinvested into common units or shares in the fund, often at a discount to the current market price. Investors can set up distribution reinvestment plans with the partnership itself, or with a broker through which the units are held.
Understanding Distribution Reinvestment
Distribution reinvestment investment plans are also known as DRIPs. They are not to be confused with dividend reinvestment plans (also called DRIPs), which are found in many large-cap stock mutual funds. Most distributions are done quarterly, but some may occur on a monthly basis.
Investors who participate in these programs also generally have commissions, and other fees waived, making it an advantageous and affordable way to grow their investment. Meanwhile, financial managers have a stable way to grow assets with current investors.
Distribution Reinvestment Real Estate Investment Trusts (REITs)
A real estate investment trust is a company that owns – and typically operates – income-producing real estate or real estate-related assets. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to go out and buy commercial real estate. Income-producing real estate assets include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. What distinguishes real estate investment trusts from other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own investment portfolio, as opposed to reselling those properties after they have been developed.
To qualify as a real estate investment trust, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Mutual Fund Distributions
Mutual funds are required by law to payout portfolio earnings to investors. Interest and dividends earned on a fund's portfolio become dividend payments to fund investors. If portfolio holdings are sold for a profit, the net profits become an annual capital gains distribution. The option to reinvest dividends automatically is a benefit of mutual fund investing. Mutual funds are one of the few types of investments where earnings can be reinvested to compound and grow. Dividends and capital gains are reinvested at no cost.