Dividend reinvestment plan

A dividend reinvestment program or dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company. The investor does not receive quarterly dividends directly as cash; instead, the investor's dividends are directly reinvested in the underlying equity. (The investor must still pay tax annually on his or her dividend income, whether it is received or reinvested.)

This allows the investment return from dividends to be immediately invested for the purpose of price appreciation and compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs are free of charge for participants, while others do charge fees and/or proportional commissions.

Similarly income trusts and closed-end funds, which are numerous in Canada, can offer a Distribution Reinvestment Plan and a Unit Purchase Plan which operate principally the same as other plans.

Because DRIPs, by their nature, encourage long-term investment, rather than active trading, they tend to have a stabilizing influence on stock prices.

Although the name implies that reinvesting dividends is the main purpose of these plans, many companies offer a complementary Share Purchase Plan (SPP). An SPP allows the enrollee to make Optional Cash Purchases (OCPs) periodically of company stock. The dollar amount of the OCP is sometimes subject to minimum and maximum limits, e.g. a minimum of $ 25 per OCP or a maximum that cannot exceed $100,000 per year. Low-fee or no-fee Share Purchase Plans are important to enrollees as they offer a quick and cost-effective way to increase their holdings. And just like when dividends are reinvested, optional cash purchases are for fractional shares to 3 or 4 decimal places.

DRIPs have become popular means of investment for a wide variety of investors as they enable them to effectively take advantage of dollar-cost averaging with income in the form of corporate dividends that the company is paying out. Not only is the investor guaranteed the return of whatever the dividend yield is, but he or she may also earn whatever the stock appreciates to during his or her time of ownership. However, he or she is also subject to whatever the stock may decline to, as well.

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