One of the numerous financial complexities surrounding buying equities, dividend reinvestment programs are often misunderstood and can be misinterpreted by many investors who do not read the fine print with respect to what they expect to receive in the form of dividends over time.
Dividend Reinvestment Programs (DRIPs) are set up by companies wishing to withhold paying dividends in cash, but rather issuing shares in lieu of cash to existing shareholders.
The fact that these dividends are not cash, dilute existing shareholders, are taxable, and do not bode well when a company's stock price is seen as undervalued, many companies operating in beaten up sectors have removed DRIP programs, now paying out said distributions via cash.
Other companies in capital intensive industries may choose to set up DRIPs, to allow for more of said company's cash flow to be reinvested within the core business, thereby offering more room for growth.
For long-term investors willing to "roll over" dividends into existing positions, DRIPs are an excellent means of doing so; for retirees looking to withdraw cash from their investment account on a regular basis, continuously selling shares is a costly and time consuming process.
Having the discussion of whether to opt in, or out, of a DRIP with a financial advisor should be a priority for investors of all walks of life, as the pros and cons of such programs can be meaningful for those who seek to make withdrawals or wish to use dividends to re-balance one's portfolio over time.
Invest wisely, my friends.
