DRIPs allow investors to use dividends to automatically purchase more shares of the same stock, incrementally increasing their holdings and producing additional dividends over time. Companies benefit by raising capital without issuing dividends or staging public offerings. 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 for you to use the dividends generated by various holdings to buy more shares of those same holdings. In many cases, a DRIP investing approach requires creating a mechanism that automatically allows all or a portion of the dividends received from select stocks of stocks to be used as funds to purchase more shares of those same stock options. With this approach, investors can incrementally increase their holdings in a particular stock holding, which in turn produces additional dividends over time.
In practice, DRIPs work by circumventing the need to actually issue a dividend payment to the shareholder. Instead, the investor receives notification of the total dividend earned for the period, then a breakdown of the number of shares that were purchased with that dividend. It is not unusual for the issuing company to cover any brokerage fees associated with the transaction and also to price the shares at a slight discount.
Both investors and companies can benefit from the use of DRIPs. For investors, the ability to acquire additional shares is more or less automatic, allowing them to avoid the hassle of placing an order with a broker to acquire additional shares. At the same time, the investor can buy those additional shares at a unit price below the current market price. The end result is the ability to build a profitable portfolio with less money and effort, a strategy that is often considered a great way to manage long-term investment options.
Businesses also benefit from the DRIPs approach. The ability to sell additional shares to investors instead of issuing dividends effectively helps the company raise additional capital that it can use to expand the business. In addition, the company saves on the expenses normally associated with staging some type of public offering, as current investors are acquiring the available shares through the DRIPs program.
One potential liability of a DRIPs strategy is that if the company’s issued shares begin to falter in the market, the investor may do well to receive dividends and start selling his or her shares before the share price reaches a certain level. Bass . Depending on how the DRIP approach is structured, there may be a waiting period before recently acquired shares can be offered for sale. For this reason, reading the terms and conditions associated with the DRIPs offer before committing to this strategy is extremely important.
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