May 22, 20222 min read
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A Dividend Reinvestment Plan or DRIP refers to an investor who uses his or her dividend earnings to reinvest back into the stock of the company that paid the dividends.

An investor can decide on whether they would like to receive a dividend payment that allows them the opportunity to receive a discount on future stock or share purchases of the company. Or, they could receive additional shares of the company as a dividend payment.

These actions depend solely on the company that issues both the stock or shares and the dividends. Additionally, a dividend reinvestment plan also depends on the person’s investment strategy and whether they want to increase their earnings, or perhaps grow the potential value of their stocks and dividend yield.

What are dividends?

Dividends are paid out to investors or shareholders of a company. In the case that a company generates a large profit or accumulates retained earnings, they can then either decide on whether these earnings will be paid out to the shareholders, or use those earnings as a way to reinvest back into the company.

How are dividends calculated?

The amount of dividends depends solely on the number of profits generated by the business. The value of dividends is determined on a per-share basis, meaning that if one shareholder holds more shares than another, they will receive a higher dividend payout.

There’s also the fact that dividends can differ depending on the type of stocks an investor or shareholder has i.e., common or preferred.

Dividend Types

Dividends can be paid in different forms, including cash, stocks, assets, special dividends, and common or preferred.