CHAPTER 13

Dividend reinvestment plans (DRIPs)allow shareholders to reinvest their dividends in the company by purchasing additional shares instead of receiving cash dividend payments.

The majority of large companies offer dividend reinvestment plans to their stockholders. These plans allow stockholders to automatically reinvest dividends in the stock of the firm paying the dividend. Dividend reinvestment plans can be classified as either old stock or new stock plans.

Under (A new stock , an old stock) dividend reinvestment plan, the company gives any cash dividends that investors would have received to a bank, which acts as a trustee. The bank then uses the money to repurchase the company's stock on the open stock market. The bank allocates the shares purchased to the participating stockholders' accounts on a pro rata basis.

( High, Low ) levels of participation in a dividend reinvestment program suggest that stockholders are content with the amount of cash dividends that the firm is paying out.