How Dividend Reinvestment Plans Work?
1. Enrollment: Shareholders who wish to participate in a DRIP must first enroll in the program. This can usually be done through their broker or directly with the company’s transfer agent. During enrolment, shareholders provide instructions on how they want the dividends to be reinvested.
2. Dividend Payment: When a company declares a dividend, shareholders who are enrolled in the DRIP do not receive the dividend payment in cash. Instead, the cash amount equivalent to the dividend is used to purchase additional shares of the company’s stock.
3. Share Purchase: On the dividend payment date, the company’s transfer agent or broker executes the purchase of additional shares on behalf of the shareholders enrolled in the DRIP. The number of shares purchased is determined by dividing the cash dividend amount by the current market price of the company’s stock.
4. Fractional Shares: In cases where the dividend amount is not sufficient to purchase whole shares, fractional shares may be issued. For example, if a shareholder’s dividend payment amounts to ₹50 and the stock price is ₹100 per share, the shareholder would receive 0.5 (or half) of a share.
5. Reinvestment: The newly purchased shares are automatically added to the shareholder’s existing holdings in the company. This increases the total number of shares owned by the shareholder, leading to potential future dividend payments.
6. Compound Growth: Over time, the reinvestment of dividends leads to the compounding of returns. As shareholders accumulate more shares through DRIPs, they receive larger dividend payments, which in turn are reinvested to purchase even more shares. This cycle continues, exponentially growing the shareholder’s investment over the long term.
7. Optional Features: Some DRIPs offer optional features, such as the ability to purchase additional shares through optional cash payments or the option to reinvest dividends in different securities offered by the company.