What Is a Common Dividend Vs. a Plan Dividend?
When you invest in a company, you're entitled to earn dividends on that company's profits. Dividends are awarded to investors according to the shares they own in a company. The different types of dividends include common dividends and those earned under a dividend reinvestment plan.
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Common Dividends
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A common dividend (also referred to as a cash dividend) is paid out to an investor who holds common stock. The payments are based on a company's net profits for a certain period of time and are proportional to the amount of shares that an investor holds. For instance, if a company made a profit of $100 for a quarter, and you owned 10 percent of the company's shares, you'd be entitled to a dividend of $10.
Plan Dividends
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Dividends received through dividend reinvestment plans (often referred to as DRIPs) differ substantially from common dividends. If you earn dividends on shares that you purchased through a dividend reinvestment plan, the money is not paid out to you directly. Instead, these plan dividends are reinvested in the company, meaning that the company can still make use of that capital. In return for the dividends reinvested in the company, investors receive additional shares of stock instead of cash payouts.
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Advantages of Reinvestment Plan Dividends
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DRIP dividends have several advantages as compared with common dividends. Under a dividend reinvestment plan, shareholders can often purchase additional shares at a discounted price. At the same time, investors don't need to invest additional capital to acquire more shares; instead, a shareholder's dividends are automatically used to purchase additional shares. In this way, an investment earns income that's compounded and reinvested instead of simply being paid out.
Disadvantages of Reinvestment Plan Dividends
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DRIP dividends also have a few disadvantages as compared with common dividends. For one, many dividend reinvestment plans have high initial setup fees. It's also harder to sell shares quickly when they're tied up in a dividend reinvestment plan. Your money is tied up in DRIPs, whereas common dividends provide a steady source of income. Lastly, dividend reinvestment plans are offered by relatively few companies, whereas most enterprises sell traditional shares of stock that pay out common dividends.
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