Dividend Reinvestment Plan or DRIP : NobleTrading Blog

Thursday, March 4, 2010

Dividend Reinvestment Plan or DRIP

Dividend reinvestment plan or DRIP, sometimes called DRP, is a very popular investment strategy which helps investors to gradually grow their share in a company. DRIP is an investment program run by a company for its shareholders. As the name suggests, it includes reinvesting the dividend owned to purchase more company stocks.

Dividend reinvestment plans usually work like dollar cost averaging, but have some unique features and benefits. The main beneficiaries of DRIPs are small investors who wish to benefit from the long-term performance of companies by buying-and-holding those shares. There are now many companies offering DRIPs and one can enroll oneself in a plan by buying as low as one share of the company. Many companies allow their DRIP investors to purchase stocks at discounted rate and most of these plans have very low minimum requirements.

Most dividend reinvestment plans come with two unique features.

No commission or brokerage fee: as the investor is directly dealing with the company, no brokerage fee is involved. Moreover, most companies reinvest the dividend without any fees or commissions.
Percentage share ownership: dividends are reinvested in a way that the investors can own partial stocks in addition to whole numbers. For example a $1 dividend for a $10 stock can be reinvested to own 1/10 of a share. The company keeps detailed records of share ownerships.