A dividend reinvestment plan (DRIP or DRP) is a plan offered by a company to shareholders that it allows them to automatically reinvest their cash dividends in additional shares of the company on the dividend payment date. Dividend reinvestment plans are typically commission-free and offer a discount to the current share price.
The three common types of dividend reinvestment plans
1. Company-operated DRIP
The company operates its own DRIP and a specific department handles the entirety of the plan.
2. Third party-operated DRIP
The company outsources the DRIP to a third-party that handles the entirety of the plan. This is usually done when it is too costly and time-consuming for the company to operate its own DRIP.
3. Broker-operated DRIP
Some companies may not offer a DRIP, but brokers may provide a DRIP on some investments to investors. With a broker-operated DRIP, brokers purchase shares on the open market. Typically, depending on its relationship with clients, brokers will charge little to no commission for DRIP stock purchases.
Example of a DRIP
Mary owns 1,000 shares in a real estate investment trust (REIT) and participates fully (100%) in the company’s dividend reinvestment plan. The REIT declares a dividend of $10/share payable on December 1. On said date, the market price of the share is $100, and the dividend reinvestment plan offers a 15% discount. With full participation in the company’s DRIP, how many additional shares will Mary be able to purchase in the DRIP?
On December 1, Mary receives a cash dividend of $10,000 (1,000 shares x $10). Mary fully participates in the DRIP, thereby reinvesting 100% of her cash dividends into additional shares of the company. On the payment date, the market share price is $100. With a 15% discount from the DRIP, Mary is able to purchase additional shares at a price of $85 ($100 x 0.85).
With a purchase price of $85 and $10,000 in cash dividends, Mary will now own an additional 117.6471 shares ($10,000 / $85) in the real estate investment trust. Typically, the fractional amount (0.6471) is carried toward the next dividend payment. Therefore, with the DRIP, Mary will own an additional 117 shares.
Advantages of a Dividend Reinvestment Plan
A dividend reinvestment plan offers the following advantages:
1. Accumulate shares without paying commission
Shareholders are usually not charged a commission or additional brokerage costs when purchasing shares through DRIPs. Therefore, they save on transaction costs when participating in a DRIP.
2. Accumulate shares at a discount
Most companies offer a discount to the current market price of their shares. Shareholders are able to purchase shares at a lower cost basis when participating in a DRIP.
3. Compounding effect in action
Due to the automatic reinvestment of cash dividends, DRIPs help investors achieve compounding returns. Reinvestment leads to compounding, which grows the investment faster.
For example, consider an investor that receives a cash dividend on his shares. The investor fully participates in a DRIP and reinvests the cash dividends for additional shares. During the next dividend payout, the investor will receive more cash dividends due to the additional shares purchased through the DRIP. The cycle of reinvestment compounds the investor’s returns and increases the return potential.
4. Acquisition of long-term shareholders
Shareholders that participate in a DRIP typically adopt a long investment horizon. Therefore, a DRIP is advantageous for companies looking to create a base of loyal, long-term shareholders.
5. Creation of capital for the company
DRIPs allow a company to generate more capital. The company is able to raise additional capital by directly giving shares to shareholders in return for cash dividends.
Investment in cryptography
A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal
More than 6,700 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs. The total value of all cryptocurrencies on Jan. 27, 2021, was more than $897.3 billion, according to CoinMarketCap, and the total value of all bitcoins, the most popular digital currency, was pegged at about $563.8 billion. (You can check the current price to buy Bitcoin here.)
These are the 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap, a cryptocurrency data and analytics provider.
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way
Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did.
That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.“For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability.”