| A dividend reinvestment program or dividend
reinvestment plan (DRIP) is an equity investment option offered directly from
the underlying company. The investor does not receive quarterly dividends
directly as cash; instead, the investor's dividends are directly reinvested in
the underlying equity. (The investor must still pay tax annually on his or her
dividend income, whether it is received or reinvested.)
This allows the investment return from dividends to be immediately invested for
the purpose of price appreciation and compounding, without incurring brokerage
fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs
are free of charge for participants, while others do charge fees and/or
proportional commissions.
Similarly income trusts and closed-end funds, which are
numerous in Canada, can offer a Distribution Reinvestment Plan and a Unit
Purchase Plan which operate principally the same as other plans.
Because DRIPs, by their nature, encourage long-term investment, rather than
active trading, they tend to have a stabilizing influence on stock prices.
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