Dividend Reinvestment Plans and Their Benefits

Dividend Reinvestment Plans and Their Benefits

Dividend reinvestment plans, or DRIPs, are a good way for you to reinvest variable amounts in a company through the life of the long-term investment. When you reinvest dividends, shareholders can buy shares or fractions of shares of some of the popular public companies for little amounts at a time.

In this article, we’re going to talk about Top Forex Brokers 2018 the benefits of DRIPs to a shareholder and the company. If you’re curious about this program, you better read this article!

DRIPs’ Benefits to Investors

Dividend reinvestment plans that are operated by the company are free of commissions since there is no broker required to facilitate the trade. This quality has been very appealing to small investors who would have to save funds for a longer period of time just to make the normal brokerage commission fee a small enough proportion of their purchase amount.

Some plans provide Finance Brokerage HQbroker Review optional cash purchase of additional shares straight out of the company, usually at a 1 to 10 percent discount and with no fees attached.

DRIPs are also very flexible by nature. Investors can invest small or large amounts based on their financial position. Some DRIPs let investors to contribute as low as  $10 or as high as $500,000 at one time.

DRIPs use a technique called dollar-cost averaging, which is the method of averaging out the price at which you buy stocks as it moves up or down over a long period.  When you’re using this method, you will never buy the stock right at its peak or its low.

DRIPs’ Benefits to Companies

As for the company, it benefits from dividend reinvestment plans by being able to access low cost capital. When you buy a stock on an exchange, you’re basically buying it from another investor, and that means the company doesn’t really benefit from the sale.

Meanwhile, the DRIPs are bought directly from the company and the proceeds will then be reinvested in the company.

Companies also benefit from DRIPs because such plans encourage a stable shareholder base that normally has a long-term investment style. DRIP investors are not likely to desert when the market begins to shake.  

That’s partly because DRIP shares are less liquid than the shares in a regular brokerage account or shares in the secondary market. If you want to sell them, it might take a little more time and effort than just tapping a broker.

Bear in mind that if the shares come from a company-operated DRIP, they need to be repurchased by the company and this does not allow for the kind of easy sales found In the general stock markets.

Effects of DRIPs on a Company’s Stock Price

If the DRIPs are issued by the company, the shares are issued from the company’s own reserve of shares.  When investors want to sell any shares purchased through DRIP, they can only sell them back to the company.

And because of this, a DRIP that’s operated by the company itself does not affect the stock price of the shares in the market.

On the flip side, a  DRIP that’s operated by a brokerage account purchases its shares directly through the secondary market. Since these shares are both bought and sold at the current market price, a broker-operated DRIP will have the same effect on stock prices as a normal buy or sell transaction in the open market.

 

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