DRP Types and Benefits
DRP stands for Dividend Reinvestment Plan. Under such a plan the dividends you are paid are directly used to purchase additional stocks. Many companies offer this possibility to their shareholders ranging from purchasing large amounts to small amounts of shares. However, you are not require to reinvest the dividends you are paid. It all depends on the plan you have selected. The reinvestments in additional stock are usually done on monthly basis, but it can be schemed as the shareholder desires.
Types of DRPs
There are several types of DRPs. Some of them are:
- Company-Run DRP
This type of DRP is offered by companies themselves. Under the conditions of company-run DRP you can purchase directly a stock from the company although you don't possess a single share beforehand. However, there are exceptions and each company specifies its own conditions. Being a part of the shareholder relations, the company-run DRP is administered directly from the corporate headquarters. Some companies have gone even further by offering IRAs (Individual Retirement Accounts) in addition to the DRP.
- Brokerage-Run DRP
If the company you are a shareholder of doesn't provide its own DRP, you can ask your brokerage firm for such. Brokerage-run DRP allow for the reinvestment of dividends. However, they differ from the company-run DRPs in the possibility of optional cash purchases, which are not allowed by the brokerage-run DRPs. This somehow reduces the attractiveness of brokerage-run DRPs, because most investors consider the optional cash purchases as a big plus of DRPs.
- Transfer Agent-Run DRP
Many companies have outsourced the management of DRPs to third parties called transfer agents. The latter represent financial institutions that manage DRPs on behalf of companies. They use their services because many of them find burdensome the management of the DRPs. Additionally, since transfer agents operate the DRPs of many customers using the same resources, the cost is significantly reduced. Financial institutions that act as transfer agents include Chase Mellon, First Chicago Trust and etc.
Benefits of a Dividend Reinvestment Plan
The first benefit of DRPs is that in order to get started you need a small amount. What's more most DRPs allow you to start with as little as one share of the company you have selected.
A second benefit is that DRPs are cost-effective. This means that if you are too irrational at spending your money, DRPs will help you to purchase additional shares without spending the dividends you have obtained for needless things. Additionally, the reinvestment under a DRP occurs at no cost.
Furthermore, DRPs allow the additional purchase of more shares at a small fee, which is waived by most companies. Often referred to as Stock Purchase Plans (SPPs) or Optional Cash Purchase Plans (OCPs), such plans give investors the opportunity to spend as little as $10 to $50 for the purpose of acquiring more stocks.
The wide availability and popularity of DRP is another of its advantages. What's more, many companies in their attempt to be ahead of the pack, have introduced the option of purchasing stock at a discount from the current market price, which is again for the good of investors.
DRPs teach investors to disciplined investing due to their nature of dividend reinvestment. Thus, investors become used to investing for the long-term in one particular stock allocating small amounts of money. Many companies now offer the possibility of making automatic debits from bank accounts for the purpose of periodic DRP investments.
Final Piece of Advice
We recommend the use of a DRP for those of you who want to make regular monthly investments. By using DRPs you will be able to circumvent brokerage commissions and at the same time reinvest the dividends you acquire. As a result you will be able to grow the money you have over the long-term and set the required investment discipline.
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