A dividend reinvestment plan DRIP is offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.

A DRIP is an excellent way to increase the value of an investment. This term is sometimes abbreviated as "DRP. Normally, when dividends are paid, they are received by shareholders as a check or a direct deposit into their bank account.

As of , many companies offer shareholders the option of reinvesting the amount of the dividend by purchasing additional shares through a DRIP. Shares must be redeemed directly through the company.

If a company does not offer a DRIP, one can be set up through a brokerage firm. Many brokers allow dividend payments to be reinvested in the shares of any stock held in an investment account. Although the dividends are not actually received by the shareholder , they still need to be reported as taxable income. There are several advantages of purchasing shares through a DRIP.

Companies that don't charge you fees or commissions to invest directly through its Direct Investment Plan--or DRIP.

DRIPS offer shareholders a way to accumulate more shares without having to pay a commission. Between no commissions and a price discount, the cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market.

Long term, the biggest advantage is the effect of automatic reinvestment on the compounding of returns. When dividends are increased, shareholders receive an increasing amount on each share they own, which can also purchase a larger number of shares. Over time, this increases the total return potential of the investment.

The Best DRIPs & Dividend Reinvestment Plans | DRIP Advice

Because more shares can be purchased whenever the stock price decreases, the long-term potential for bigger gains is increased. Dividend-paying companies also benefit from DRIPs in a couple of ways. First, when shares are purchased from the company for a DRIP, it creates more capital for the company to use. Second, shareholders who participate in a DRIP are less likely to sell their shares when the stock market declines.

One reason is the shares are not as liquid as shares purchased on the open market. Another reason is DRIP participants can more easily recognize the role their dividends play in the long-term growth of their investment.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

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