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Dividend Reinvestment Plans (DRIPs) is a program run by public companies, which allow to reinvest dividend and/or make cash purchases directly from the company. A DRIP does not require a lot sum of money, so almost anyone can invest in it. Typically a shareholder only needs one share to participate in a company’s DRIP plan, mostly the company will not charge fee or commission for the dividend reinvestment.
Company will benefit from DRIP because it provide stable base of shareholder who are likely long-term investment strategy (buy and hold). This makes the companies stock price stable, low fluctuation. The nature of DRIP makes it difficult to liquidate shares, making it more as an instrument for long-term investing. By doing DRIP, the company keeps the capital inside thus raising additional capital.
For investor, DRIP enables them to participate into it with as little money as $10. Buying stocks from the company and bypassing the broker, will lower the cost of investing because there is no fees or commission for the broker. DRIP also helps investor by with cost averaging, because they will invest in a fix dollar amount on regular basis. Sometimes they will buy at high price, and sometimes at low price, thus averaging the price and saving investor from buying stock at high price.
Because company in this case gives dividend, it is also a form of income and therefore stills a subject for tax.
DRIP is suitable for long-term investing. You can start with a solid company with good management, and financial performance.
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