A Dividend Reinvestment Plan (DRIP) is a plan that applies any dividend payment received by an investor to purchase new shares of the company’s stock. A Dividend Reinvestment Plan also allows the individual investor to purchase additional shares periodically without incurring brokerage fees. The advantages of a Dividend Reinvestment Plan are: One, the investor enjoys the benefits of dollar cost averaging; two, the investor avoids brokerage fees to purchase more shares; and three, the investor is able to purchase shares in small increments (sometimes as low as $10) allowing him or her to build a portfolio over time while still participating in the returns.
Dividend Reinvestment Plans are offered as company-sponsored plans or from large investment firms. A company-sponsored Dividend Reinvestment Plan is basically a shareholder benefit that makes it easy for individual shareholders to start and increase investment over time. With a brokerage house Dividend Reinvestment Plan, the investor pays the investment firm a commission to purchase the original shares and then the broker buys additional shares using dividends received with no additional commission charges.
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