Drip Investing or “DRIP” is an acronym for dividend reinvestment plan, but DRIP also describes how the way the plan works. With DRIPs, the cash dividends that an investor receives from a company are reinvested to purchase more stock, making the investment in the company grow little by little.
- A DRIP is a dividend reinvestment plan whereby cash dividends are reinvested to purchase more stock in the company.
- DRIPs use a technique called dollar-cost averaging intended to average out the price at which you buy stock as it moves up or down.
- DRIPs help investors accumulate additional shares at a lower cost since there are no commissions or brokerage fees.
How DRIPs Work
A dividend is a reward to shareholders, which can come in the form of a cash payment that is paid via a check or a direct deposit to investors. DRIPs allow investors the choice to reinvest the cash dividend and buy shares of the company’s stock. In the DRIP Plan, shares are bought from the companies directly. Many companies offer shareholders the option to reinvest the cash amount of issued dividends into additional shares through a DRIP. Since these shares usually come from the company’s own reserve, they are not offered through the stock exchanges. Furthermore, the “dripping” of dividends is not limited to whole shares, which makes these plans somewhat unique. The corporation keeps detailed records of share ownership percentages.
For example, let’s say that the IBM (International Business Machine) paid a $10 dividend on a stock that traded at $100 per share. Every time there was a dividend payment, investors within the DRIP plan would receive one-tenth of a share.
Benefits of DRIPs
DRIPs offer a number of benefits for both the investors buying shares with their cash dividends and the companies offering DRIP programs.
More information about DRIP investing and Dividends in general can be found at the Dividend Resource Center.