Dividend reinvestment program
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A Dividend Reinvestment Plan (also known as "DRIP") is an equity investment option offered directly from the underlying company. The investor typically does not receive quarterly dividends directly as cash. Instead the investor's dividends are directly reinvested in the underlying equity. (It should be noted that the investor still must pay tax annually on his or her dividend income, whether it is received or reinvested.)
This allows the investment return from dividends to be immediately invested for the purpose of price appreciation (and compounding), without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs are free of charge for participants, while others do charge fees and/or proportional commissions.
Although the name implies that reinvesting dividends is the main purpose of these plans, most also allow the enrollee to make additional (or optional) monthly or quarterly cash purchases of company stock, subject to minimums of $10 or more and maximums that often exceed $100,000 per year. These optional cash purchases (or OCPs) may also be commission-free and, like the dividends that are reinvested, need not be in whole-share increments. (Most plans allow fractional shares to 3 or 4 decimal places.)
DRIPs have become popular means of investment for a wide variety of investors as they enable them to effectively dollar cost average with income in the form of corporate dividends that the company is paying out. Not only is the investor guaranteed the return of whatever the dividend yield is, they may also earn whatever the stock appreciates to during their time of ownership (however, they are also subject to whatever the stock may decline to, as well).
External links
- [What Are DRIPs]
- [DRIP Investing Resource Center]
- [Motley Fool explains DRIPs]
- [DRIP.net guide to divident reinvestment investing]
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