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 their dividends in the stock of the firm paying the dividend. Dividend reinvestment plans can be classified as either old stock or new stock plans.

Understanding how dividend reinvestment plans work

dividend reinvestment program invests the dividends in newly issued stock. This type of plan raises new capital for the firm.

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.