A dividend reinvestment plan (DRIP) defines a program for traders to reinvest their dividend payments. This program automatically uses its cash dividend to purchase additional shares or fractional shares of stock, of the underlying company.
Sometimes traders use the DRIP term to refer to the automatic reinvestment program from investment or brokerage companies. But, commonly, traders use it for a formal program for the shareholders given by the publicly traded companies.
Defining the Dividend Reinvestment Plan
Most traders get their dividend payment in the form of a direct deposit into their bank account or a check. But, with DRIP, traders have the option to directly use their dividend payment to purchase additional shares.
Yet, the shares purchased through DRIP, usually, are not marketable in the stock exchanges. That is because they purchase the shares from the company’s own reserve. Thus, it can only be redeemed through the company, also.
Most of the DRIPs let the traders make the purchase of additional shares commission-free. Besides, traders can also use the program to buy the stocks at a discount to the current stock price.
Yet, the program usually also have a reinvestment minimum, usually not much lesser than $10. Even if normally companies only provide DRIP for their existing shareholder, yet some companies also offer it to the new shareholder.
The Benefits of Using DRIP
The biggest advantage of using this program is traders can accumulate more shares of stock without paying an extra commission. Besides, many companies also give a discount through their DRIP. The discount usually ranges from 1% to 10% of the current shares price.
With that discount and no commission fees, traders can have a significantly low cost. Other than that, DRIP also allows traders to purchase fractional shares. That way, each dividend dollar will work for the traders.
For the long-term benefit, traders will get the benefits of compounding returns. With an increasing amount of shares, traders get higher dividend payments. In the end, that increases the investors’ total return potential of that investment.
