subject: Dividend Reinvestment Plans by Dulton Group [print this page] Companies can pay dividends in a number of ways. Each way of dividend payment has its own effects to company and investors. One of these methods is the Dividend Reinvestment Plan, or DRIP.
Some companies have in place a system that allow shareholders to automatically reinvest their dividends into the purchase of additional company shares. Shareholders must register to sign up for the dividend reinvestment plan.
Investors enjoy a number of benefits out of this plan:
It allows accumulation of company shares using cost averaging.
Shareholders additional investments are in the company which she has already deemed a good investment.
Reduces transaction costs.
Some companies offer the additional benefit of purchasing shares at a discount (usually 3-5%) of the market price.
On the other side of coin, reinvestment plans has its own problems as well. A disadvantage to the shareholders is the extra bookkeeping involved in jurisdictions in which capital gains are taxed. Shares purchased though the dividend reinvestment plan change the average cost basis for capital gains tax purposes. If the share price is higher than the original purchase price, it will increase the average cost basis, and vice versa. Either way, the average shareholder is left with an accounting situation which is complicated to handle. In such cases, the right decisions are often difficult to take for shrouded accounting information. Dulton group helps you through these processes.
A further perceived disadvantage to the shareholder is that the cash dividend is fully taxed in the year received even when reinvested, which means the shareholder is paying tax on cash not actually received. Avoiding these scenarios is vital for successful investments.
