Two Types of Dividend Reinvestment Plans

There are two types of dividend reinvestment plans:

* Plans that offer shareholders "old stock," or stock that already exists
* Plans that offer shareholders "new stock"

The first type of DRIP has an outside trustee repurchase shares on the secondary stock market. These shares are purchased to re-issue them to shareholders in the dividend reinvestment plan. The shareholder will get the shares at market price. However, the corporation will often offer to cover the commission and fees to encourage shareholders to participate in the plan.

In the second type of DRIP, the shareholders receive newly issued shares directly from the company. This implies that the company has control over whether to provide an additional discount. Some corporations will go as far as offering their stock at 3–5 percent below the market price. Companies offer these discounts because they save the costs of going through an investment banker to issue the new shares. The goal is usually to have shareholders continuing to invest.