Dividend reinvestment plans, or DRIPs, are offered by a company or corporation to enable the investor to reinvest their cash dividends into additional shares or fractional shares of the stock on the dividend payment date.
Most DRIPs let investors to buy shares commission-free, with a sizeable discount to the current share price. Meanwhile, many DRIPs do not permit reinvestments that are lower than $10.
There are generally 2 types of DRIPs: company-managed and brokerage-managed DRIPs.
Foreign Exchange Markets Companies that offer DRIPs have their investor relations department manage all the aspects of the plan, while brokerages stimulate DRIPs for investors whose stocks do not offer such reinvestment plans.
Here are some of the advantages that you might get when you try out dividend reinvestment plans.
Perhaps one of the greatest advantages of DRIPs is Currency Pairs that it doesn’t require you to pay any commission to any entity. Most online brokers do not ask for any fees when an investor decides to reinvest their dividends back into shares of the stock.
With less commission fees, the investors will save up a lot of amounts. Commission fees, even if they’re low, can still accumulate and rack up your overall investment costs. In addition, the broker will have the benefit of holding on to the client because of the DRIP feature.
If your dividend amounts to $20 every dividend payment date, and the price of the share is $40, the DRIP will let you slowly build up your position as you regularly reinvest the dividends you receive.
In the longer run, you will have higher holdings in that company, and if the company performs well in the industry, you can expect a better payday.
Automated Stock Purchase
The dividend reinvestment plan can be set up to reinvest any dividend payment right back into the stock—automatically.
That means you don’t really have to lift a finger after the plan has been set up. if you’re the busy kind of investor, this can mean a huge advantage for you.
In fact, you only have to spend 5 minutes to set up the feature with your broker, and then afterwards, the reinvestment processes will be fully automatic.
No Lower Limit
All kinds of dividend reinvestment plans have no lower limit, or minimum amount of shares to be owned.
You can avail the dividend reinvestment plan even if you only own one share. You will still be eligible for the program. This means that all investors have the chance to benefit from the program.
Company DRIP Discount
There are companies that give discounts when investors purchase more shares under the dividend reinvestment program. This practically means that investors who use their dividends to buy additional shares will be able to obtain more shares.
This is very good for those who are already holding a sizeable number of shares in the company. They would be able to build their positions much faster.
The only downside is that not many companies offer huge discounts to investors. Most of them offer only between 1 percent to 5 percent discounts.