DRIPS Offer Many Benefits to Investors
Dividend reinvestment plans or DRIPs allow shareholders to reinvest dividend pay-outs back into the underlying stock. Shareholders have the option to purchase varied amounts of stock in actual whole shares or fractions. When a person participates in a dividend reinvestment program rather than getting a check for their earned dividends, the company will, in turn, reinvest the person dividends for them in their name in the form of additional shares. These programs are an excellent way for long-term investors to get a larger return on their original investment.
There are many benefits that an investor can derive from participating in a company’s DRIP. Many investors like DRIPS because they are efficient. When an investor chooses utilize a DRIP, the investor does not have to pay commissions because no broker was involved in the transaction of the trade. This makes DRIPs particularly well suited for smaller scale investors who would normally have to save up enough cash to cover the investment and the commission. In addition, many DRIPs offer the opportunity to purchase additional shares in cash and offer a discount of up to ten percent on the share purchase with no additional fees attached.
Many investors choose to utilize DRIPs because of the flexibility they provide. DRIPs allow investors to invest both large and small amounts. For instance, many DRIPs allow investors the opportunity to buy shares in fractions. DRIPs allow participants to purchase however much of a share they can afford with their dividend. A brokerage on the other hand, will require their client to reinvest by purchasing at least one whole share.
Additionally, many DRIPs employ the dollar cost averaging technique. This technique averages the cost of a share for program participants by charting the stock as it moves up and down in the market over time. Thus, DRIP investors can avoid price volatility.
Similar to investors, many companies find DRIP programs advantageous. When an investor buys a company’s stock outside of a DRIP, the stock is purchased from another investor and not the company itself. This means that company has already reaped the financial benefit from selling that stock. The firm gets no added benefit from that particular sale. However, when an investor buys stock from the company’s DRIP, they are buying the stock directly from the company. This means that the company is getting direct benefit from that sale. This can be a great source of financing for many companies because it generally costs less than borrowing, issuing bonds, or issuing more stock.
Additionally, offering a DRIP program helps create a stable base of shareholders that are typically looking for long-term investments, not quick buy and sells. DRIPs have positive benefits for both the investor and the company, which is why they have worked so well for such a long period of time.