What does a dividend reinvestment plan do?

• A. Allows stockholders the option to reinvest their dividends to purchase more stock.
• B. Provides cash dividends to shareholders.
• C. Reduces taxes on dividends.
• D. Puts dividends into a separate account.

Answer: (A)

A dividend reinvestment plan automatically uses the cash dividends you receive to buy more shares of the same stock, often without paying commissions and sometimes including fractional shares. This setup lets your investment grow automatically over time because the new shares can themselves generate dividends, creating a compounding effect. It’s not about paying out cash to you, reducing taxes, or putting dividends into a separate account—the plan’s purpose is to reinvest those dividends into additional shares.