10/09/2014
Dividend Re-investment plan (DRIP):
1. Dividend reinvestment plans (DRIPS) permit stockholders to reinvest their dividends to purchase additional shares rather than to be paid out in cash.
2. With bank-directed DRIPS, banks purchase additional shares on the open market in huge blocks which substantially reduces per share commissions.
3. With company-directed DRIPS, the company itself issues new shares in exchange for the cash dividend completely eliminating commissions.
4. With brokerage-directed DRIPS, brokerage firms such as Charles Schwab will reinvest dividends for shareholders who hold stocks in street name at no charge.
Advantages of DRIPS
1. For Stockholders
2. Substantial reduction in commission costs.
3. They provide investors with an automatic savings mechanism.
For Companies
1. Goodwill
2. Reduction in cost of delivering dividend checks.
3. An inexpensive means of raising equity capital for firms company-directed plans.
Types: (i). Old Stocks Purchase (ii). New Stock Purchase
Basic Factors that affect the Dividend
A. Bond Indenture
B. Preferred stock restriction
C. Impairment of capital
D. Availability of cash
E. Penalty tax on improperly accumulated retain earning
Extra factors affecting the Dividend
A. Number of possibility investment opportunities.
B. Possibilities of declining and accelerating of projects.
Note: - Proxy fight looms (fight for voting proxy right from shareholders)
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