Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dividend Reinvestment Plan (DRIP)

What it is:

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 it works (Example):

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 it Matters:

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.

Related Terms View All
  • Initial Jobless Claims
    The data in the Initial Jobless Claims report reflect how many people filed for...
  • Options Clearing Corporation (OCC)
    The OCC confirms, certifies and clears contract trades.  It also acts as a market maker...
  • Maintenance Expenses
    For example, let's assume that Company XYZ is a restaurant chain. Its regular maintenance...
  • Zero Capital Gains Rate
    For example, downtown ABCTown has decayed over the last 10 years. There are many vacant...
  • Bellwether
    Let's assume XYZ Company is an auto manufacturer. If XYZ Company stock typically falls...