A dividend reinvestment is an investment plans by the corporation that allows to the investors to reinvest their cash dividend by purchasing additional dividend shares on the dividend payment date. Investors can reinvest their dividends directly in the underlying equity. They do not get the quarterly dividends directly cash. When an investor reinvests his or her dividend they must pay the annual tax on their dividend income. DRIP is a good way to increase your investment’s value. DRIP can be free or paid. Most DRIP allow to buy shares commission free and at discount to the current share price but some DRIP don’t allow reinvestments much lower than $10. By reinvesting the dividends investors can purchase the shares of some good publicly traded companies at a low price of $10 at a time.
There are lots of advantages and disadvantages of Dividend Reinvestment Plans. Here I am sharing some of them:
Advantages of Dividend Reinvestment Plan (DRIP) –
- DRIP is a flexible investment plan. It allows to investors to invest a large of small amount, according their financial position. Investors can buy shares with small amount of money without the brokerage fees.
- Some DRIPs have an automatic option that allows the investors to withdraw a specific amount of money from their account each month. This is a great plan for those investors who want to follow a consistent and disciplined investment plan.
- When investor enrolls in a DRIP, the companies send the report of their annual and quarterly earnings. Investors can better understand of stock performance by the companies report.
- Some DRIPs offers discount in the range of 1% to 10% from its spot price in the market. So the shares can be more considerable for purchasing for the investors.
- There are some DRIPs that offers discounted stock price, which is generally 3 to 5% on purchases from dividend reinvestments or optional payments. This can give the investors instant dividend yield.
- It is also a great way for young people who get started in stock investing. They can buy a few shares from a company which has DRIP plan and get the DRIP wizard. They watch their stock value and their holding increase with the automatic dividend reinvestments and they will learn the importance of investing.
- DRIPs are also beneficial for the companies because they offer a low-cost access to capital. The DRIPs shares can buy directly from the company and then reinvested into the company.
Disadvantages of Dividend Reinvestment Plans (DRIPs) –
There are also some disadvantages of DRIPs. They are:
- It is not necessary that every publicly traded company offers a DRIP program, so investor may not be able to invest in the firm they want.
- When investors buy and sell the shares directly through a company, they are not able to issue any stop or limit orders.
- If you are going to reinvest your dividends, you can miss the other buying opportunities because the reinvesting dividends can take away the opportunity to purchase another company’s stock with those dollars.
- In DRIPs you don’t receive a check for the entire reinvested dividend so the IRS considers them taxable income.
- It is a big challenge to tracking on your cost basis because it is common for those investors who use DRIP programs to be totally uniformed about the cost of each share that they own.
Dividend reinvestment plan is an easy way for the investors to generate more income and a cost efficient means of purchasing stock in a company. It is very easy, you need to select a company that offers dividend reinvestment plans directly and ask them how to set up an account. You can also search on the internet about it.