Tapping Into the Dividend Well: Reinvesting With DRIPs

July 16, 2016

Dividends have long served as an enticement for investors to get their investment in the hands of the issuing corporation. From their first use, dividends have at least partially satisfied an investor’s desire to share in a company’s profit. Dividends provide a realized return to the investor without the need to sell off the investment. Once the dividend has been handed out to investors, though, a greater question arises: What should you do with the extra cash?

A disciplined solution to this question is to reinvest that money back into some kind of security, so that even more return is accrued and compounded from your initial investment. Corporations and investors alike love the idea of reinvesting distributed capital, which is why systems have formed to expedite the reinvestment process for investors.

Many public companies offer their shareholders dividend reinvestment programs or plans (DRIPs), which automatically reinvest the dividends paid. Instead receiving the quarterly cash dividend, investors receive more underlying shares in a company. What the investor receives in shares varies based on the company’s policy, the share price, and the dividend amount. If a dividend does not cover the entire price of a whole share of common stock, the DRIP allows the purchase of a fractional share.

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