Dividend-News

Income Lab Ideas: Dividend Reinvestment Plan

Published Fri, 03 Apr 2020 08:00:00 -0400 on Seeking Alpha

Exploring another way on how closed-end funds can grow their share count and managed assets.
Generally, if a fund is trading at a premium, this is the win-win-win situation.
A large majority of DRIPs are implemented in the same manner, as well as the vast majority of funds offering them.
Co-produced by Stanford Chemist
A dividend reinvestment plan or DRIP can be a win-win-win for those that utilize the plan, current shareholders and the fund managers themselves. There seems to be a similar standard that we typically see as far as how closed-end funds implement such a plan. This is a more in-depth look at DRIPs more specifically from when we covered the subject of "How Do Closed-End Funds Grow Their Share Count?"
This relates to that previous piece as it is one of the three ways that funds grow their share count and ultimately, their assets under management. It is generally the slowest way that funds grow their share count. Essentially, the fund is "retaining" what it would have normally paid out to a shareholder in the form of a distribution.
In the case of the DRIP, we generally see new shares created when the fund is trading at a premium. If, however, shares are trading at a discount it is less of a win-win situation for current shareholders and fund managers. With that being said, it can still be beneficial to investors that participate in such a program. This is for the simple fact that those that do participate basically have their investment on auto-pilot. Thus, automatically growing their share count without having to do anything. They don't even have to look at their account.

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The case when it can be the win-win-win situation is when shares trade at a premium though. That is what we will primarily be looking at today. Additionally, this should help many newer readers better understand CEFs. It might also be a greater refresher or be helpful for older readers as well. This is a topic that comes up quite a bit at the Income... Read more