D irect stock purchase plan or Dividend reinvestment plan (DRIP)

1. Direct stock purchase plan or Dividend reinvestment plan (DRIP) What is a Dividend? A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders.

2. Benefits • Enrolling in a DRIP is easy. The paperwork (both online and in print) can normally be filled out in under one minute. • Dividends are automatically reinvested. Once the investor has enrolled in a DRIP, the process becomes entirely automated and requires no more attention or monitoring. • Many dividend reinvestment plans are often part of a direct stock purchase plan. If the investor holds at least one of his shares directly, he can have his checking or savings account automatically debited on a regular basis to purchase additional shares of stock. Purchases through dividend reinvestment programs are normally subject to little or no commission. • Dividend reinvestment plans allow the investor to purchase fractional shares. Over decades, this can result in significantly more wealth in the investor's hands. • An investor can enroll only a limited number of shares in the dividend reinvestment plan and continue to receive cash dividends on the remaining shares.

3. The Payout Process • Declaration date: The declaration date is the day the Board of Director’s announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date. • Date of record: This date is also known as “ex-dividend” date. It is the day upon which the stockholders of record are entitled to the upcoming dividend payment. According to Barron’s, a stock will usually begin trading ex-dividend or ex-rights the fourth business day before the payment date. In other words, only the owners of the shares on or before that date will receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would. • Payment date: This is the date the dividend will actually be given to the shareholders of company. • Most dividends are paid four times a year on a quarterly basis, but some companies, such as McDonald’s, pay dividends on an annual basis.

4. Companies with Dividend • McDonald’s (MCD)Payout Ratio: 50% • Coca Cola (KO)Payout Ratio: 20% • Wal-Mart (WMT)Payout Ratio: 29% • Altria Group (MO)Payout Ratio: 86%

5. Resources • http://beginnersinvest.about.com/od/dividendsdrips1/ss/dividends-and-dividend-investing-101.htm • http://www.dividendgrowthinvestor.com/ • http://www.investorwords.com/1509/dividend.html