What is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan (DRIP) is an arrangement offered by companies to investors wishing to receive additional shares of company stock in lieu of cash dividend payments.
How Does a Dividend Reinvestment Plan (DRIP) Work?
In many cases, optimistic investors prefer to gain additional equity in a company rather than receive the cash dividends related to their holdings. A dividend reinvestment plan (DRIP or DRP) provides investors with a system of recurring dividend reinvestments. In other words, rather than receiving cash from a declared dividend, participating investors receive shares and fractional shares of company stock of equivalent value.
To illustrate, suppose company XYZ's stock is valued at $10 per share. XYZ declares a dividend of one dollar per share. A DRIP participant holding 100 shares will receive 10 shares of company stock [(100 shares x $1 per share) / $10 per share = 10 shares]. In most cases, these shares are discounted and free of brokerage charges.
Why Does a Dividend Reinvestment Plan (DRIP) Matter?
A dividend reinvestment plan gives participating investors increasing equity in the issuing company with each declared dividend. Depending on the market price of the stock, participants run the risk of forcibly receiving shares at a higher price than they might otherwise be willing to pay.