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What Are Dividend Reinvestment Plans?

Some corporations offer their shareholders the option of reinvesting their dividends in additional shares of stock. This allows shareholders to purchase additional shares of stock directly from the company without having to use a brokerage service. This is known as a dividend reinvestment plan (DRIP).

Once you own some of the company's stock, you then may be eligible to participate in a dividend reinvestment plan.

However, to be eligible for a dividend reinvestment plan, most corporations require that you purchase your original shares from a brokerage house. Once you own some of the company's stock, you then may be eligible to participate in a dividend reinvestment plan. Nonetheless, many brokerage services can be very helpful in pointing out to investors (who ask) which companies offer dividend reinvestment plans.

The obvious advantage to dividend reinvestment plans is the potential to save on brokerage commissions through direct purchases. With benefits to both the shareholder and corporation, a DRIP is a win/win strategy.