Dividend Reinvestment Plan (DRIP)
What It Is:
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 (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 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.gives participating investors increasing