What is a Treasury DRIP

A Dividend Reinvestment Plan (DRIP) that uses dividends to purchase more shares directly from the company's treasury stock. Oftentimes, because the company is issuing the shares, it will offer the shareholder a small discount on the share price; this discount typically ranges from 2-4%.

BREAKING DOWN Treasury DRIP

By reinvesting dividends, shareholders can purchase shares or fractions of shares (if the dividend amount is less than the value of one share) of some of the most well-known publicly-traded companies for as little as $10 at a time. Instead of giving the investor a quarterly dividend check, the entity running the DRIP (the company, transfer agent, or brokerage firm) uses the money to purchase additional shares of the company in the name of the investor.

If the company itself is operating the DRIP, it will set specific times in the year (usually quarterly) when the purchase of shares by shareholders in its DRIP program is allowed. The company itself does not go into the secondary market and purchase the shares and then sell them through the DRIPs. The shares sold through the DRIP are taken out of the company's share reserve. DRIP shares cannot be sold on the market; when investors are ready to sell their DRIP shares, they must sell them back to the company that issued them at the current market price.

More than 650 companies offer DRIP plans and Investors generally look for stocks that offer higher, steady dividends. Investors also gravitate to turnaround candidate DRIPs, where the share price has collapsed or perhaps the dividend has been cut and there is some expectation that the company will return to its prosperous ways.

Market DRIP

The other common type of dividend reinvestment plan is the market DRIP. In a market drip, a company uses its cash dividends to purchase shares on the open market, rather than from its treasury.

DRIPs can also be set up through a brokerage, though there's generally no discount on the share price and there may be commissions. If the DRIP is operated by a brokerage firm, the firm simply purchases shares for you from the secondary market and adds the shares to your brokerage account, and these shares are eventually sold back on the secondary market.

Using a DRIP can help companies develop investor loyalty and a stable shareholder base. The advantages to shareholders include convenience and a lack of commission charges on acquiring new shares through a DRIP program.