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
  • Quitclaim Deed
    For example, let's say John Doe and Jane Doe are married and live in a house that they...
  • Natural Capital
    Let's say Company XYZ is a paper manufacturer. It owns 50,000 acres of forestland in...
  • Z-share
    For example, let's say John Doe works in the human resources department of the XYZ Fund...
  • Z
    On the Nasdaq market, for example, the letter Z after the ticker (an XYZ Company security...
  • Nanny Tax
    For example, let's say John and Jane Doe hire Sally Smith to take care of their two...