What is a dividend reinvestment plan?
Some companies offer dividend reinvestment plans (DRP). These enable investors to automatically reinvest dividend payments into new shares in the company. DRPs generally allow investors to reinvest either a portion or all of a dividend payment into new shares. As the company is issuing the new shares there won’t be any brokerage or transactions costs involved. Some companies may also issue the shares at a discount to the listed share price at that time.
Dividend reinvestment plans and dollar cost averaging
One of the benefits of regularly reinvesting dividend payments is that over time share prices tend to move, so shares can be purchased at different prices. This concept is known as dollar cost averaging, which works on the concept that by purchasing shares on a regular basis over a period of time rather than buying all the shares at once an investor can avoid only buying shares when the price is high.
Why do companies offer dividend reinvestment plans?
By offering new shares in a company rather than distributing cash to investors through dividends, the company is able to keep the money to reinvest in the company instead.
How does a dividend reinvestment plan work?
Companies that offer dividend reinvestment plans will generally advise investors when they buy shares that the company offers a DRP and provide instructions on how to take part. This generally involves completing a DRP form and returning it to the company’s share registry; many companies will also have the option of opting in or changing your preferences online.
Do all companies offer dividend reinvestment plans?
Not all companies provide the option of dividend reinvestment plans, nor is there any guarantee if they do that it will continue.
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