Dividend Reinvestment Plans, or “DRIPS”

Dividend Reinvestment Plans (DRPs), more commonly known as DRIPS, are offered as a method for shareholders to buy stock directly from the company. These plans also offer the option of dividend reinvestment, hence the name. Sometimes reinvesting dividends are required for participating.

Advantages of DRPs include the small level investment required to participate in the program. Usually, only minimum stock ownership (1 share) qualifies. Another advantage is putting the dividends towards further investment. Dividends are far more valuable when they are reinvested. Some companies offer DRPs that allow the investor to purchase stock at a discount price of 1 to 10 percent below the market price. Investing in stocks in this manner encourages the stockholder to hold on to the stock and to regularly contribute towards the investment. Many DRPs even offer stock purchasing through debit accounts.

DRPs can be managed by the company itself, by a transfer agent, or by a brokerage. Company run DRPs usually have the lowest minimum requirement for stock ownership. These are completely maintained within the corporation. Transfer agents have stepped in to manage DRPs to provide a cost-effective way for corporations to offer a DRP. Oftentimes, transfer agents can manage DRPs at a much lower cost than the corporation. Brokerage-run DRPs sometimes offer dividend reinvestment plans at no cost for companies that do not have a formal DRP. However, these plans do not offer optional cash purchases similar to the company offered plans.

The great advantage to Dividend Reinvestment Plans is the minimal requirements for participation. DRPs offer an excellent option to investors with little to invest as a way to stock ownership. The plans encourage holding onto the equity so the stock has time to grow in value over a long period of time.

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