When you buy dividend stocks, companies pay you periodically for holding their shares. A dividend is a way for the company to say thank you for investing in us, and dividends mostly come from the company’s profits in the previous year.
In a DRIP plan, instead of receiving that small dividend check at the end of every financial period, the company reinvests the dividend payout and buys more shares in a DRIP plan.
A dividend is a return to shareholders on their investment. It’s usually in the form of cash payment that can be paid through check or deposited directly to the shareholder’s account.
A DRIP plan offers investors an opportunity to reinvest their cash dividend and purchase the company shares. However, they will need to buy the shares directly from the company.
For instance, you have 1000 shares in a company that pays $1 per share in dividends. Therefore, if you enroll in a DRIP program, you will get $1000 in dividends.
However, if we assume that the company’s stock is trading at $50 when receiving the dividend, you will be allocated an additional 20 shares instead of a dividend check.