What is DRIP

Many people are aware that shareholders have unique benefits such as dividend payouts. There are also dividend reinvestment plans that make use of these payouts to grow wealth strategically. Want to learn more about DRIP stock and DRIP investing? Investors should be aware of what dividend reinvestment programs are.

What's a dividend reinvestment program ? (DRIP?)

Dividend Reinvestment plans, also known as DRIP, are when an investor who has received dividend payments in cash reinvests these pay-outs into stock. This allows the company to grow its investment over time. DRIP employs a technique called rupee cost averaging that allows one to calculate the average price at which one purchases a stock, as its stock price fluctuates. DRIP's main benefit is that it allows investors to accumulate more shares without having to pay brokerage fees or commissions.

What Does DRIP Do?

Investors can purchase shares in company stock commission-free by reinvesting cash dividends. This dividend can be a form or reward for shareholders. It can come in the form of a check, direct deposit or cash. The shares were purchased directly from the companies. Companies often offer shareholders the chance to reinvest dividends into additional shares by creating a dividend reinvestment program. These shares are usually drawn from the company's reserves. These shares are not offered by stock exchanges.

The benefits of reinvesting dividends

We now know what a DRIP is and how it works. There are many benefits to using a DRIP. DRIPs can be beneficial for both investors and companies.

Reinvesting dividends for investors has many benefits

DRIPs employ a technique known as 'rupee-cost averaging'. This is a method that aims to even out the price at the stock's purchase, since the stock's price fluctuates over a long time. With rupee cost average, you won't be buying stock at its highest or lowest price. Company-operated DRIPs are popular among shareholders because they are low-cost and allow them to accumulate more shares.

DRIPs offer investors another benefit: they can be used in a variety of ways. Investors can return varying amounts of their dividends to the stock company. DRIPs are often free of brokerage fees and commissions. Many companies actually offer shares through dividend reinvestment plans at a discounted price.

It is typically 3% to 5% less than the current share price. Investors can significantly reduce their cost base when purchasing shares in companies by combining trading fees and a discount on the share price. DRIPs are a great way for investors to save money on buying additional shares of stock. They would have been subject to trading commissions and the market price if they had bought them on an open stock trade.

Reinvesting dividends for companies has many benefits

We now come to the benefits that reinvest dividends can bring for companies offering such programs. Investors are attracted to companies that offer DRIP investing and a dividend reinvestment plan. Investors who invest in these programs receive capital investments in cash as a reward for their efforts. The capital generated by investors who invest in DRIP stocks can be used to reinvested back into the company's operations. This capital can be reinvested back into the company by companies.

Remember that shareholders who have been part of the company’s dividend reinvestment program are less likely to sell their shares if the company publishes a negative report showing earnings in a declining market. These investors are loyal and willing to stay with the DRIP program over the long-term.

The Bottom Line

Dividend reinvestment plans have many advantages for both investors and companies offering DRIP stock. They offer flexibility, rupee cost average, low cost, wealth generation, and flexibility. You can become familiar with dividend investing programs and add one or more to your investment portfolio to make a long-term stock investment.