DRIP, an acronym for Dividend Reinvestment Plan, describes the plan where the cash dividends that an investor receives from a company are reinvested to purchase more stock, which allow the investment in the company grow little by little. DRIPs use dollar-cost averaging method to average out the price at which investors buy stock as it moves up or down. DRIPs help investors accumulate additional shares at a lower cost since there are no commissions or brokerage fees.
A DRIP account can be opened with a stock transfer agent or another sponsoring financial institution. Many banks serve as DRIP agents and many investors open DRIP accounts through a company called Computershare.
After opening a DRIP account, investors can set up a reoccurring purchase instructions for regular timeframe to purchase the stock shares. It can set up to purchase shares on weekly, monthly or quarterly basis. Many companies do not charge commissions or fees for this service.
Many companies offer shareholders the option to reinvest the cash amount of issued dividends into additional shares through a DRIP. The reinvestment of the stock shares is not limited to whole shares but reinvested for fractional shares.
For long-term investors who favor high dividends producing stocks and regularly reinvestment opportunities, DRIP is an excellent low-cost option to buy more shares of the stock