Chapter 5 - Dividend Reinvestment Plans: A Puzzle within the Puzzle

Abstract

This chapter focuses on the features of dividend reinvestment plans (DRIPs), which have their roots in the late 1920s. About more than 1500 firms with DRIPs, representing all walks of life in corporate America, are listed on the internet. In practicality, the DRIP allows small investors to use dollar averaging, bypassing the broker and saving on possibly high brokerage fees. DRIP allows bondholders and preferred stockholders to reinvest coupon payments and preferred dividends in the firm's stock and permit customers of the business to contribute through billing systems and savings accounts. DRIP provides safekeeping facilities for stockholders who want to leave their shares with the plan administrator. The most obvious disadvantage of the DRIP from the shareholder's point of view is the tax aspect. Taxes must be paid, out of pocket, for the reinvested dividends, and records must be kept concerning the timing and purchase price of the shares.