DRIPs allow investors to use dividends to purchase additional shares of the same holdings, gradually increasing their holdings and generating more dividends over time. Companies benefit by raising capital without issuing dividends or mounting a public offering. However, investors should be aware of potential liabilities and read the terms and conditions before committing to a DRIP strategy.
Dividend Reinvestment Plans, or DRIPs, are investment strategies that make it easy to use the dividends generated by multiple holdings to purchase additional shares of those same holdings. In many cases, a DRIP investment approach requires the establishment of a mechanism that automatically allows all or a portion of the dividends received from selected stocks to be used as funds to purchase more shares of those same stock options. With this approach, investors can gradually increase their holdings in a particular stock holding, which in turn generates additional dividends over time.
In actual practice, DRIPs work by circumventing the need to actually issue a dividend payment to the shareholder. Instead, the investor receives a notification of the total dividend earned for the period, then a breakdown of the number of shares that have been purchased with that dividend. It is not unusual for the issuing company to cover the brokerage fees associated with the transaction, and also to list the shares at a slight discount.
Both investors and companies can benefit from using DRIP. For investors, the ability to purchase additional shares is more or less automatic, allowing them to avoid the hassle of placing an order with a broker to purchase additional shares. At the same time, the investor can purchase those additional shares at a unit price that is lower than the current market price. The end result is the ability to build a profitable portfolio for less money and effort, a strategy often considered a great way to manage investment options over the long term.
Businesses also benefit from the DRIP approach. The ability to sell additional shares to investors instead of issuing dividends effectively helps the company raise additional capital for use in expanding the business operation. In addition, the company saves on the expenses normally associated with mounting some type of public offering, since current investors are buying shares available through the DRIP program.
One possible liability of a DRIP strategy is that if the shares issued by the company begin to falter in the market, the investor may do well to receive the dividends and start selling their shares before the share price reaches a certain point. low level. . Depending on how the DRIP approach is structured, there may be a waiting period before those newly acquired shares can be offered for sale. For this reason, reading the terms and conditions associated with the DRIP offer before committing to this strategy is extremely important.
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