DRIP can be either free or paid, most DRIP allow to buy shares without paying any commission and at discount to the current share price, but some DRIP’s do not allow reinvestments much lower than $ 10.
25th July 2013
Dividend Reinvestment Plans are becoming increasingly popular with listed companies instead of other alternatives, such as payment of scrip dividend. Under a DRIP, instead of receiving a cash dividend, shareholders can elect to take shares, the company will then arrange for the shares to be purchased on the market. Investors can reinvest their dividends directly in the underlying equity; DRIP can be either free or paid, most DRIP allow to buy shares without paying any commission and at discount to the current share price, but some DRIP’s do not allow reinvestments much lower than $ 10. It is a flexible investment plan and allows the investors to buy shares with small amount of money without any brokerage fee. When an investor enrols into a dividend reinvestment plan, the companies send the report of their annual and quarterly earnings; investors can understand how their stock is performing through the quarterly reports sent by the company. Experts also opine that this form of dividend reinvestment is ideal for beginners who get started in stock investing, they can buy a few shares from a company which has dividend reinvestment plan and watch their stock value appreciate with the automatic dividend reinvestments and learn the importance of investing through this process. Dividend Reinvestment Plans are also beneficial to the companies because they offer a low cost access to capital.
How is a DRIP implemented?
Publicly listed companies adopt the following procedure for implementing a DRIP:
A circular is sent to shareholders advising them that the company is introducing such a scheme and setting out its terms and conditions, shareholder’s approval for the scheme is not required. The circular will also be accompanied by a mandate form by which shareholders may elect to join the DRIP, the dividends of all participants in the scheme are paid to the registrars who then instruct a designated broker to purchase shares in the company using the cash dividend. Shareholders then receive the maximum number of shares that could be bought with their cash; any surplus cash available will be carried forward and added to future dividend payments for re-investment under the scheme. Once the shares have been purchased in the market, a share purchase advice must be sent to each participant together with a share certificate and tax voucher. A shareholder’s mandate to join a DRIP is revocable at any time, the company will also be free to withdraw, postpone or vary the DRIP at any time. Most company sponsored DRIP’s have a minimum of just $ 10 for investment, and allow accumulation of fractional shares, this allows even the small stockholders to participate in the dividend reinvestment plan. Some of the leading corporates that sponsor their DRIP programs include Caterpillar Inc, Coca-Cola Co, Exxon Mobile Corp, General Electric etc.
The Compounding Value of DRIP investing
Participating in a DRIP program provides low cost compounding of your investment dollars, allowing you to accumulate more shares and increase the value of your position at a much faster rate even when the price of the stock does not do well as against the expectations of the shareholders.