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What Is a Stock Dividend Reinvestment?

Jim B.
Jim B.

Stock dividend reinvestment is the process by which shareholders of a certain company are able to use their dividend payments to purchase more stock in the company. Doing this over a long period of time can help an investor amass a large amount of shares without paying much extra cash. Although companies vary in the type of stock dividend reinvestment plans they offer, most allow shareholders to automatically reinvest their dividends to purchase shares directly from the company. In some cases, these plans may even include the option to purchase even more shares at discount prices compared to what other non-shareholders would have to pay.

Those people who invest in the stock market often have different goals for what they want out of their capital. Some are interested in quick profits, but those who are looking for long-term stability can also utilize stocks for this purpose. If an investor can amass a great amount of shares in specific companies, their personal worth will grow significantly as a result. One way to acquire these shares is through stock dividend reinvestment.

Man climbing a rope
Man climbing a rope

Understanding how stock dividend reinvestment works requires first understanding what dividends are. Dividends are like bonuses that are given to shareholders as a reward for investing in a company. Companies give them out when they have extra cash on their hands. It is important to note that companies are not required to offer dividends on a regular basis, but many of the most successful, long-standing companies are known to offer them without fail.

In some cases, investors might simply want to take the dividends and use them for whatever they desire. Choosing to take those dividends and buy more shares of the stock in question is stock dividend reinvestment. By using this technique, investors can continually grow the amount of shares that they have in a company. This process also allows their dividends payments to grow in tandem with the amount of shares owned, since payments are generally determined on a per-share basis.

To find out if a company offers a stock dividend reinvestment plan, investors should check out the investment prospectus offered by that company. Most companies that offer these programs do so only to those investors who have at least one share of the company. Investors should also find out whether the reinvestment program allows them to buy stock directly from the company. If that is not the case, commission fees paid to brokers will lessen the impact of the reinvestment. Some companies also allow investors to pay extra cash to buy shares at a discount if they are enrolled in a dividend reinvestment plan.

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