Dividend Reinvestment Plan
A dividend reinvestment plan (DRIP) is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. Although the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation to existing shareholders. Around 650 companies and 500 closed-end funds currently do so.
Dividend Reinvestment Plan (DRIP)
Definition
A Dividend Reinvestment Plan (DRIP) is a program that allows investors to reinvest their cash dividends into additional shares of the underlying stock. Through this plan, investors can choose to automatically use the cash dividends they receive to purchase more shares of the company, rather than receiving the dividends in cash. This plan is typically offered by publicly traded companies to existing shareholders, but it can also be set up through brokerage firms or investment companies as an automatic reinvestment arrangement.
Origin
The concept of the Dividend Reinvestment Plan originated in the early 20th century, with the earliest DRIP plans dating back to the 1920s. Over time, the popularity of these plans grew, especially in the latter half of the 20th century, as more companies began offering them to make it easier for shareholders to increase their holdings.
Categories and Characteristics
Dividend Reinvestment Plans can be broadly categorized into two types: company-sponsored DRIPs and brokerage or investment company-sponsored DRIPs.
- Company-Sponsored DRIPs: These plans are typically managed directly by the company, and shareholders can participate through the company's website or by mailing in forms. Company-sponsored DRIPs often have no transaction fees and may offer shares at a discount.
- Brokerage or Investment Company-Sponsored DRIPs: These plans are managed by third-party brokerage firms or investment companies, and investors can participate through their brokerage accounts. While this method may incur some transaction fees, it offers greater convenience.
Specific Cases
Case 1: The Coca-Cola Company
The Coca-Cola Company offers a DRIP that allows shareholders to reinvest their cash dividends into additional shares of the company. Through this plan, shareholders can choose to automatically reinvest their dividends without paying any transaction fees. Additionally, Coca-Cola offers the option to purchase shares at a discount, further incentivizing shareholder participation.
Case 2: Johnson & Johnson
Johnson & Johnson also offers a similar DRIP. Shareholders can register for the plan through the company's website and choose to reinvest their dividends into additional shares of the company. Johnson & Johnson's DRIP also does not charge transaction fees and allows shareholders to purchase fractional shares, making it accessible to small investors.
Common Questions
1. Are there risks associated with participating in a DRIP?
While DRIPs can help investors increase their holdings, they also carry market risk. If the company's stock price declines, the reinvested portion will also be affected.
2. Is a DRIP suitable for all investors?
DRIPs are suitable for investors who wish to hold stocks for the long term and increase their holdings through dividend reinvestment. However, they may not be suitable for investors who need regular cash flow.
