What Is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan (DRIP) is a program that enables investors to reinvest their cash dividends into additional shares of the underlying stock.
Most DRIPs allow investors to purchase shares commission-free or for a nominal fee, often at a significant discount to the current share price.
Key Takeaways
- A DRIP uses the proceeds generated from dividends to purchase more shares of the company.
- Investors can buy shares commission-free or at a nominal fee, often at a discounted rate compared to the current share price.
- DRIPs are taxed as ordinary dividends, even though they are used to purchase shares.
- These benefits allow investors to compound their returns over time by accumulating more shares.
There are several advantages to purchasing shares through a DRIP.
Advantages for the Investor:
- Shareholders can accumulate more shares without paying a commission.
- Many companies offer shares at a discount ranging from 1% to 10% off the current share price.
Advantages for the Company:
Dividend-paying companies benefit from DRIPs in a couple of ways:
- They receive more capital.
- Shareholders who participate are less likely to sell.
Real-World Example of a DRIP
Many major ASX-listed companies offer DRIPs, including BHP (ASX: BHP).
For instance, if you had purchased $10,000 of BHP stock in July 2003 and reinvested dividends at an average rate of 8% per year, your investment would now be worth $49,268.
You can download the offline guide here Dividend Reinvestment Plan Guide
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