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What Is A Dividend Reinvestment Plan And What Are The Advantages?

If you want to earn income from an investment without having to sell it, then you need to go for companies and funds that pay out dividends.

These dividends will usually be issued to your investment account every quarter in the form of cash. However, you will usually have the option to automatically reinvest these dividends into the same company or fund.

What is a cash dividend?

A cash dividend is when the given corporation distributes funds to shareholders from the current earnings or profits. These dividends will be paid out in cash and they are usually issued on a regular basis, such as monthly or quarterly. 

Not all companies pay out dividends, it will usually be those firms that are well-established, have stable cash flow, and are not a purely growth-focused operation. There may often be special dividends paid out if there is a notable event, such as a significant legal settlement. Each period, the company will decide if the dividend will be decreased, kept the same, or increased.

What exactly is a dividend reinvestment plan?

This is the process whereby you reinvest cash dividends into additional shares or fractional shares of the underlying investment when the dividend is paid. Some brokerages will allow you to set up these automatic reinvestment programs, as well as many of the bigger publicly traded corporations. This means that you can avoid having to do so manually each time you are issued a dividend.

Advantages of a dividend reinvestment plan

Oftentimes when you enroll in a dividend reinvestment plan, you will not have to pay any sort of commission when doing so. There will also often be discounted share prices given by the company through these programs. Therefore, there are a lot fewer costs associated with investing through a dividend reinvestment plan than if you were buying shares from the open market. There is also the ability to purchase fractions of shares, so the entire dividend sum will be invested. 

Over time, your investment and returns will compound when you automatically reinvest. As dividends increase, you will also get greater regular payouts from each of your shares. Naturally, there will also be advantages for the company offering these plans. They will have more capital available to use and these long-term investors are less likely to sell their positions when there is a decline in the market.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above.

Andrew O'Malley
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.