What Is a Treasury DRIP?
A treasury drip—short for “treasury dividend reinvestment plan”—is a plan whereby investors automatically reinvest their dividend payments into new shares purchase directly from the company’s treasury stock.
Oftentimes, treasury DRIPs will entitle investors to a small discount on the shares purchased, typically ranging from 2-4%. Treasury DRIPs differ from market DRIPs, in which the dividends are reinvested on shares purchased on the open market.
- A treasury DRIP is a plan whereby investors automatically reinvest their dividend payments into new shares.
- These plans can help investors grow their positions with minimal fees, sometimes at a discount to the prevailing market value.
- DRIPs are available from hundreds of publicly traded firms, including some of the world’s largest and most prominent companies.
How Treasury DRIPs Work
Treasury DRIPs are voluntary plans in which an investor can opt in to having their dividend payments automatically reinvested into the issuing company’s shares. The word “treasury” refers to the fact that the shares being purchased are sourced from the company’s own stock of treasury shares, rather than being purchased from other shareholders on the secondary market.
The main attraction of DRIPs in general is that they can help investors steadily grow their position in a particular stock, while also minimizing brokerage fees. Of course, investors will typically only opt in to these programs if they believe in the long-term prospects of the issuing company. Investors who are not especially optimistic about the issuing company will likely prefer receiving their dividends as cash and simply investing the proceeds elsewhere.
Another advantage of treasury DRIPs specifically is that they often provide a discounted price on the purchased shares. Even a modest discount, such as 2-4%, can have a significant effect when compounded over several years. From the issuing company’s perspective, these programs can help encourage a loyal and stable shareholder base, reducing their investor relations costs while also potentially reducing the volatility of their share price. Such companies might be better positioned to execute on long-term strategic plans as opposed to focusing mainly on short-term financial results.
Real World Example of a Treasury DRIP
Today, income-seeking investors who wish to add one or more DRIPs to their portfolio have hundreds of options to choose from, including several companies that are among the foremost leaders in their industries.
Prominent examples include Qualcomm (QCOM), Cisco Systems (CSCO), and IBM (IBM) in the technology sector; ExxonMobile (XOM) and Edison International (EIX) in the energy sector; Procter & Gamble (PG) and Hasbro (HAS) in the consumer products sector; and Discover Financial Services (DFS) and JPMorgan Chase (JPM) in the financial sector.
In addition to setting up a DRIP directly with the issuing company, investors can also do so by using a brokerage firm. However, DRIPs configured in this manner generally do not involve a discounted rate on the share purchases, and may even require that commissions be paid to the broker. For this reason, investors generally seek to establish their DRIPs directly with the issuing company, where possible.