What is a Treasury DRIP?
A Treasury Drip – short for “Treasury Dividend Reinvestment Plan” – is a plan through which investors automatically reinvest their dividend payments in new shares purchased directly from the company treasury shares.
Often the treasury DRIP will entitle investors to a small discount on the shares purchased, usually between 2 and 4%. Cash DRIPs differ from market DRIPs, in which dividends are reinvested in shares purchased on the open market.
Key points to remember
- A cash DRIP is a plan whereby investors automatically reinvest their dividend payments in new shares.
- These plans can help investors grow their positions with minimal fees, sometimes at less than the prevailing market value.
- DRIPs are available from hundreds of publicly traded companies, including some of the largest and most important companies in the world.
How Treasury DRIPs work
Treasury DRIPs are voluntary plans in which an investor can choose to have their dividend payments automatically reinvested in shares of the issuing company. The word “cash” refers to the fact that the shares purchased come from the company’s own stock, rather than being purchased from other shareholders on the secondary market.
The main appeal of DRIPs in general is that they can help investors steadily increase their position in a particular security, while minimizing brokerage fees. Of course, investors will generally opt for these programs only if they believe in the long-term prospects of the issuing company. Investors who aren’t particularly optimistic about the issuing company will likely prefer to receive their dividends in cash and simply invest the proceeds elsewhere.
Another benefit of cash DRIPs in particular is that they often offer a discounted price on the shares purchased. Even a modest discount, such as 2-4%, can have a significant effect when compound over several years. From the issuing company’s point of view, these programs can help foster shareholder loyalty and stability, by reducing their Investor Relations costs while potentially reducing volatility of their stock price. These companies might be in a better position to execute long-term strategic plans instead of focusing primarily on short-term financial results.
Concrete example of a Treasury DRIP
Today, income-seeking investors who want to add one or more DRRs to their portfolio have hundreds of options to choose from, including several companies that are among the leaders in their industry.
The most prominent examples include Qualcomm (COMQ), Cisco Systems (CSCO) and IBM (IBM) in the technology sector; Exxon Mobile (XOM) and Edison International (AXIS) in the energy sector; Procter & Gamble (PG) and Hasbro (HAS) in the consumer products sector; and Discover financial services (DFS) and JPMorgan Chase (JPM) in the financial sector.
In addition to setting up a DRIP directly with the issuing company, investors can also do so using a brokerage firm. However, DRRs configured in this manner generally do not imply a reduced rate on stock purchases and may even require that commissions be paid to the broker. For this reason, investors generally seek to establish their DRIPs directly with the issuing company, when possible.