Dividend Reinvestment Plans

How dividend reinvestment plans work

When an investor enrolls in a dividend reinvestment plan, he will no longer receive dividends in the mail or directly deposited into his brokerage account. Instead, those dividends will be used to purchase additional shares of stock in the company that paid the dividend. There are several advantages to investing in Dividend reinvestment plans; they are:

Benefits of enrolling in a dividend reinvestment plan

*Dividends are automatically reinvested. Once the investor has enrolled in a DRIP, the process becomes entirely automated and requires no more attention or monitoring.

*Many dividend reinvestment plans are often part of a direct stock purchase plan. If the investor holds at least one of his shares directly, he can have his checking or savings account automatically debited on a regular basis to purchase additional shares of stock.

*Purchases through dividend reinvestment programs are normally subject to little or nor commissions.

*Dividend reinvestment plans allow the investor to purchase fractional shares. Over decades, this can result in significantly more wealth in the investor's hands.

*An investor can enroll only a limited number of shares in the dividend reinvestment plan and continue to receive cash dividends on the remaining shares.

Pratical examples of Dividend Reinvestment Plans

Full enrollment in a DRIP. Anthony owns 1,000 shares of Coke. The stock currently trades at $50 per share and the annual dividend is $0.88 per share. The quarterly dividend has just been paid (.88 divided by 4 times a year = $0.22 per share quarterly dividend). Before he enrolled in Coke's dividend reinvestment plan, Anthony would normally receive a cash deposit of $220 in his brokerage account. This quarter, however, he logs into his brokerage account and finds he now has 1,004.40 shares of Coke. The $220 dividnd that was normally paid to him was reinvested in whole and fractional shares of the company at $50 per share.

Partial enrollment in a DRIP. Timothy owns 500,000 shares of Altria group. The stock currently trades at $49.75 and pays an indicated annual dividend of $2.72 per share (o.68 per quarter). Timothy would lide to receive some cash for living expenses but would like to enroll some of the shares in a DRIP. He calls his broker and has 300,000 shares enrolled in Altria's DRIP.

When the quarterly dividend is paid, Timothy will receive cash dividends of $136,000. He will also receive 4,100.50 additional shares of Altria Group giving holdings of 304,100.50 shares.

Dividends on Dividends

Why are dividends reinvestment plans conducive to wealth building ? Notice that Timothy now has 4,100.5 additional shares of Altria stock. When the next quarterly dividend is paid, he will receive $.68 for each of those shares. That additional income works out to $2,788.34. Those dividends will be partially reinvested in the stock, buying more shares which will pay more dividends.

In even the smallest portfolio, dividend reinvestment plans can result in substantial increases in value over extended periods of time.

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