DRIPs permit shareholders to use their dividends to purchase additional shares of the company’s stock.
Many investors who own stocks in companies that pay dividends do not need the dividend income to meet current expenses. Rather than receiving dividend payments and then having to take the time to reinvest them, many of these investors would prefer to automatically reinvest their dividends, purchasing additional shares of the company’s stock. The result is that many larger corporations usually offer their shareholders a dividend reinvestment plan. As the name implies, DRIPs permit shareholders to use their dividends to purchase additional shares of the company’s stock. The shares are purchased directly from the company thereby avoiding brokerage commissions.
Similarly, many companies have shareholder investment plans (SIPs) that permit investors to purchase shares of the company’s stock directly from the company, again avoiding brokerage commissions.