MLM Passive Income

How do Dividends and Dividend Reinvestment Plans work with stocks?

Say I buy a stock. Do I select whether I want dividends to be reinvested or not, or how does it work? If I select not to reinvest, then how do I get the dividends paid (check, show up as cash in my account?)? If I select to reinvest, are new shares bought on a market order immediately when I receive the dividend, or how does that go? Thanks for your help!

Public Comments

1. "Do I select whether I want dividends to be reinvested or not.." Depends on who you use as a broker. Most let you decide. Scottrade does not reinvested dividends (unless you pay their $7 buy fee). Sending checks are expensive for brokerage houses so they would rather have the cash show up in you money market account. They usually supply a checkbook with the account for you to write checks as needed. If you select to reinvest, on the day the dividend is paid, they buy more shares for you at the market price.
2. First, not all companies pay dividends. Some retain their earnings and reinvest in their business. Of the companies that pay dividends, most pay the dividend quarterly. Many of these companies have dividend reinvestment plans and to sign up for them you should talk to the company's investor relations department or their stock transfer agent. The stock transfer agents run most of these programs. The way in which your investment in a company is recorded, determines how you receive your dividend. In the old days, you bought a stock through a stock broker and several weeks later, the company mailed a stock certificate to you. You became the "registered owner" and dividend checks were mailed directly to you. There are some people who still hold their stock certificates in "physical" form. However, in an effort to reduce paperwork and make the settlement of trades more efficient and less costly, the stock brokerage firms formed the Depository Trust Corporation or DTC. DTC has become the record holder for a majority of the shares traded today. When you buy a share of stock through a broker, the broker will no longer arrange to have a paper stock certificate sent to you and instead your shares will be reflected electronically in the records of the brokerage firm and on your account statement. All of the brokerage firm's account holders will be aggregated together on the books of DTC. In this way, we shares are traded between stock brokerage customers, DTC simply makes a bookkeeping entry on their system, showing the shares being traded from one stock brokerage firm to the other. The individual brokerage firms then make the notation on your account statement. When dividends are paid by a corporation, the corporation usually sends the payment in two separate wire transfers. One is sent to the corporation's stock transfer agent who then sends paper checks to those owners who hold physical shares. The other wire transfer sent electronically by the corporation to ito the holder of record of the shares held in "street name" (who is DTC) and DTC deposits the money in each of the brokerage firms' accounts at DTC. The broker then allocates that portion of the dividend to your individual account. This happens almost immediately on the dividend payment date. This eliminates the need for paper checks and results in the faster receipt of dividend payments. Once the money hits your account, you can access it. For dividend reinvestment plans, the stock transfer agent receives that portion of the dividend payment for those who elect to reinvest it. Depending on the program, the stock transfer agent can then either enter the market on a specified day and purchase shares in the market (usually at the close of trading or before the open, so that normal trading isn't affected), or it can use the average trading price of the company's stock over some period, like 10 days, and purchase the shares directly from the corporation (sometimes at a slight discount to the average trading price). In this case, the corporation would be issuing new shares. Sometimes investors can sell their shares held in the dividend reinvestment plan through the stock transfer agent, and the agent will purchase those shares for those who are reinvesting their dividends. For investors who own their shares in a brokerage account in street name, you have to sign up through your brokerage firm. Sometimes there are fees to participate in these plans.