Develop and improve products. List of Partners vendors. A dividend reinvestment plan DRIP is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. Although the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation to existing shareholders.
Around companies and closed-end funds currently do so. Normally, when dividends are paid, they are received by shareholders as a check or a direct deposit into their bank account. DRIPs, which are also known as dividend reinvestment programs, gives shareholders the option of reinvesting the amount of a declared dividend into additional shares, which are bought directly from the company.
Shares must be redeemed directly through the company, also. Most DRIPs allow investors to buy shares commission-free or for a nominal fee, and at a significant discount to the current share price ; they may set dollar minimums. While DRIPs are usually intended for existing shareholders, some companies do make them available to new investors, usually specifying a minimum purchase amount.
Although the shareholder does not actually receive the reinvested dividends, they still need to be reported as taxable income unless they are held in a tax-advantaged account, like an IRA. There are several advantages of purchasing shares through a DRIP, for both the company issuing the shares and the shareholder.
DRIPs offer shareholders a way to accumulate more shares without having to pay a commission. Between no commissions and a price discount, the cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market.
Through DRIPs, investors can also buy fractional shares, so every dividend dollar is really going to work. Long term, the biggest advantage is the effect of automatic reinvestment on the compounding of returns. When dividends are increased, shareholders receive an increasing amount on each share they own, which can also purchase a larger number of shares. Over time, this increases the total return potential of the investment.
Because more shares can be purchased whenever the stock price decreases, the long-term potential for bigger gains is increased.
Dividend-paying companies also benefit from DRIPs in a couple of ways. First, when shares are purchased from the company for a DRIP, it creates more capital for the company to use.
Second, shareholders who participate in a DRIP are less likely to sell their shares when the stock market declines. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.
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Something went wrong. Please try again later. Best Ofs. What Is Investing? How Can You Start Investing? How To Invest In Stocks. More from. By Kat Tretina Contributor. Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. When you reinvest your dividends, you use those payments to buy more company stock.
Dividend reinvestment, like any investment, has pros and cons. But reinvesting dividends can be a powerful way to boost your returns over the long term. There are two main ways to set up a dividend reinvestment plan:. You can invest directly in the dividend reinvestment plan, or DRIP, offered by the company you want to invest in, assuming it has one.
If you invest through a brokerage account, many stock brokers will let you choose to reinvest your dividends, rather than receive them as payouts. You can purchase stock by reinvesting your dividends, and often, companies will let you buy additional stock on a fractional basis. That means you can buy small pieces of the stock with your dividend reinvestment, rather than waiting until you have enough to purchase a full share.
Companies sometimes offer their stock at a discount to the market price in some cases, the discount is available only on the shares purchased through dividend reinvestment, not the optional cash purchases.
See if automatically reinvesting your IRA dividends makes sense for you. This could mean the price of the stock has fluctuated. One solution is to buy a single share from a broker and then ask the broker to register that share in your name the broker likely will charge a fee for this service. There may be enrollment and other fees, which often cost more than reinvesting dividends through a brokerage account. DRIP fees and terms vary, so it would be wise to do your research to find the best plans and, of course, make sure the company is a worthwhile investment.
Managing multiple company DRIPs may entail more paperwork than holding a single brokerage account. Company DRIP plans are solely for people who want to invest in individual stocks — and one specific stock, at that.
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