Since the shares are automatically purchased, the investor exerts no control over the price of the stock. Therefore, shareholders that do not participate in the company’s DRIP will see their ownership base diluted. Dilution of sharesĪs the company issues more shares to shareholders, more shares will become outstanding in the market. Disadvantages of a Dividend Reinvestment PlanĪlong with its advantages, a dividend reinvestment plan comes with some disadvantages, too, including the following: 1. The company is able to raise additional capital by directly giving shares to shareholders in return for cash dividends. Creation of capital for the companyĭRIPs allow a company to generate more capital. Therefore, a DRIP is advantageous for companies looking to create a base of loyal, long-term shareholders. Shareholders that participate in a DRIP typically adopt a long investment horizon. The cycle of reinvestment compounds the investor’s returns and increases the return potential. During the next dividend payout, the investor will receive more cash dividends due to the additional shares purchased through the DRIP. The investor fully participates in a DRIP and reinvests the cash dividends for additional shares. Reinvestment leads to compounding, which grows the investment faster.įor example, consider an investor that receives a cash dividend on his shares.
Compounding effect in actionĭue to the automatic reinvestment of cash dividends, DRIPs help investors achieve compounding returns. Shareholders are able to purchase shares at a lower cost basis when participating in a DRIP. Most companies offer a discount to the current market price of their shares. Therefore, they save on transaction costs when participating in a DRIP. Shareholders are usually not charged a commission or additional brokerage costs when purchasing shares through DRIPs. Accumulate shares without paying commission Advantages of a Dividend Reinvestment PlanĪ dividend reinvestment plan offers the following advantages: 1. Therefore, with the DRIP, Mary will own an additional 117 shares. Typically, the fractional amount (0.6471) is carried toward the next dividend payment. With a purchase price of $85 and $10,000 in cash dividends, Mary will now own an additional 117.6471 shares ($10,000 / $85) in the real estate investment trust. With a 15% discount from the DRIP, Mary is able to purchase additional shares at a price of $85 ($100 x 0.85). On the payment date, the market share price is $100. Mary fully participates in the DRIP, thereby reinvesting 100% of her cash dividends into additional shares of the company. On December 1, Mary receives a cash dividend of $10,000 (1,000 shares x $10).
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With full participation in the company’s DRIP, how many additional shares will Mary be able to purchase in the DRIP?
On said date, the market price of the share is $100, and the dividend reinvestment plan offers a 15% discount. The REIT declares a dividend of $10/share payable on December 1. Mary owns 1,000 shares in a real estate investment trust (REIT) and participates fully (100%) in the company’s dividend reinvestment plan. Typically, depending on its relationship with clients, brokers will charge little to no commission for DRIP stock purchases. With a broker-operated DRIP, brokers purchase shares on the open market. Some companies may not offer a DRIP, but brokers may provide a DRIP on some investments to investors. This is usually done when it is too costly and time-consuming for the company to operate its own DRIP. The company outsources the DRIP to a third-party that handles the entirety of the plan. The company operates its own DRIP and a specific department handles the entirety of the plan. The three common types of dividend reinvestment plans are: 1. Dividend reinvestment plans are typically commission-free and offer a discount to the current share price. Updated NovemWhat is a Dividend Reinvestment Plan (DRIP)?Ī dividend reinvestment plan (DRIP or DRP) is a plan offered by a company to shareholders that it allows them to automatically reinvest their cash dividends in additional shares of the company on the dividend payment date.
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