What are Dividend Reinvestment Plans?

Published by Thomas Herold in Economics, Investments

'Dividend Reinvestment Plans' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Dividend Reinvestment Plans are also known by their acronyms as DRIPs or even DRPs. These plans come from corporations and companies which permit their investors to take their cash dividends in the form of reinvesting options. Generally this amounts to the investors acquiring extra fractional shares or additional whole shares. It occurs on the payment date of the dividend. DRIPs are intelligent means of growing the actual value in an investment holding.

The majority of these Dividend Reinvestment Plans allow their own investors to purchase these shares directly from the company. This provides them with a commission-free buy in usually offered at a substantial price discount to the present price of the shares on the stock market exchange. The majority of them will not accept reinvestments for under $10.

These Dividend Reinvestment Plans allow their shareholders to continuously invest in differing amounts over the span of longer-term timeframe investments in publically traded companies. Stake holders are able to buy either whole shares or even fractional shares through such dividend reinvestments in the best-known, most-famous public companies for only $10 or more at a single time.

Choosing this option means that investors forego their quarterly dividend payment check. The DRIP operating entity could be a transfer agent, company itself, or brokerage company. They will utilize the money from the dividend check to buy extra shares on behalf of the investor in question in the relevant company.

When the corporations directly operate their own Dividend Reinvestment Plans, they will appoint particular times throughout the year when they will permit the DRIP program buy in of additional shares from the company stakeholders. This is generally on a quarterly basis. The corporations in question never wade into secondary markets on exchanges to buy the shares then resell them to their investors. Instead the shares proffered through the DRIP come out of the companies’ treasury reserve shares.

It is also important to note that such Dividend Reinvestment Plans shares issued directly by the company in question may not ever be resold on the stock market exchanges. Investors who wish to cash out of them will be forced to resell them back to the corporation which originally issued these for the present price on the stock market. When DRIPs run by brokerage companies are involved, the firm will just buy the shares for the investors who are acquiring them out of the secondary markets then tally such share into the brokerage account. In this case, these shares may be finally resold in the secondary market where they were originally acquired.

For those companies which do not directly offer their own share holders Dividend Reinvestment Plans, these can simply be established via a brokerage company. This is because a great number of the stock brokers permit their customers to reinvest such dividend payments directly into the stock shares which they already hold within their accounts. It is important that though such dividends do not come directly to the shareholders bank accounts, the IRS still requires that they be reported on a tax return like taxable income.

Many companies actually provide some significant incentives to take dividends from their DRIPs. They might provide a substantial discount of anywhere from one to ten percent from the present market share price. This can amount to a major savings when it is added to the lack of commissions on the trade.

Longer term advantages center on the miracle of compounded reinvestments on the returns. As the dividends become higher, the stake holders will receive an ever higher amount for every share they possess. This will then allow them to buy a still greater quantity of additional shares at each dividend payment. In a longer time frame, this will significantly boost the aggregate returns of the stock investment. This can really work to the advantage of the investors if the share price goes down and they gain the ability to cost average down with their DRIP share purchases. It offers them the possibility of significant gains from their reduced cost basis.

Companies like these DRIPs because they do not have to pay out as much capital when they are able to simply issue reserve shares from their treasury in lieu of cash dividend payouts. It also increases the loyalty of the shareholders, who will more likely hold on to the shares even when there are declines in the price of the share or the overall stock market.

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The term 'Dividend Reinvestment Plans' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.