Dividend Reinvestment Plan-what it is
Written by R. A. Stewart
Some companies give their investors the option of accepting a dividend or have the dividend paid out in shares. This is called a DIVIDEND REINVESTMENT PLAN (DRP or DRIP).
This can be cheaper than accepting the dividend and reinvesting the money elsewhere. This kind of arrangement makes it easier for an investor to grow their investment and saves money because investing your dividends elsewhere will attract fees for the new investment
A DRP at work
You have opted into a company’s DRP and it issues a dividend. What happens next?
Those who have opted into the companies DRP receive their dividends in the form of extra shares, while those investors who have not opted into the DRP receive their dividends in the form of cash.
The way a company calculates its share price will determine how many shares you will receive. Its method of calculation is sometimes called the “Strike Price”.
The shares are distributed within the company which means that you as the shareholder saves money on transaction fees. This process occurs each time the company declares a dividend. Sometimes the company will stop the Dividend Reinvestment Plan for one reason or another and when this happens, its shareholders will be informed of this,
Is Dividend Reinvestment Plan Right for you
Only you can answer this question, because it all depends on your personal circumstances and your goals. If you are using the income you receive from shares, in this case dividends to pay for some of your expenses, health insurance, for example, then you will want to receive the dividends into your bank account. If you are a long term investor and do not need your dividends then you may choose to opt in to the Dividend Reinvestment Plan. If you are unsure, then speak to a financial advisor.
The downfall of DRP is that it could reduce your diversification. Your strategy could be to spread your portfolio over a range of shares. Reinvesting your dividends in certain companies can mean your investment becomes unbalanced and weighted toward certain industries.
Always keep in mind that whenever there is the opportunity for a capital gain there is also the opportunity for a capital loss, therefore, it is best to invest according to your risk profile.
About this article
The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore, discretion is advised. You may use this article as content for your website/blog, or ebook.
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