It is a process whereby the distribution from a limited partnership,or other pooled investment is automatically reinvested into common units or shares in a fund, often at a discount to the current market price. 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.Investors can set up distribution reinvestment plans with the partnership itself, or with a broker through which the units are held. 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.
Also known as a DRIP, but not to be confused with dividend reinvestment plans (also called DRIPs), which are found in many large-cap stocks and mutual funds. Most distributions are done quarterly, but some may occur on a monthly basis. In some DRIPs, the investor has the option of receiving some or all dividends by check, as opposed to full reinvestment. Also, if a DRIP is discontinued, the investor’s shares typically continue to be held in book-entry form, either including fractional shares or with a refund check issued for the fractional part of the position.
Investors who participate in these programs also generally have commissions and other fees waived, making it an advantageous and affordable way to grow their investment. Meanwhile, the financial managers have a stable way to grow assets with current investors.