Dividend Reinvestment Plans (DRIPs) were the logical extension of the employee stock purchase plans that many companies began to implement at the beginning of this century.
As a lot of time and energy was devoted to building employee stock purchase plans that would allow those who worked for a company to purchase stock (often at a discount), reinvest their dividends, and purchase more stock at a later time if they so desired, many companies decided to pass along this benefit to the nominal owners of the companies as well -- the shareholders. Requiring that people already own a share to participate ensured that anyone who used the plan was either an employee of the company who had purchased or been granted some shares upon being hired, or an investor who was already familiar with the corporation.
These plans were originally designed with the intention of serving employees as well as shareholders. This is why many of the plans still allow individuals to purchase stock at a discount as well as receive other varied and assorted benefits, ranging from the ability to purchase additional stock at little or no fee to occasional free samples of company products.
As the century has gone on, many companies that do not even pay a substantial or any dividend have begun DRIPs as a way to attract a stable base of shareholders with a long-term orientation, or as a way to systematically issue new shares into the market without ever having to file for a secondary offering. Capital intensive businesses that have cannot retain much of their income due to regulation, such as utilities and Real Estate Investment Trusts (REITs), are especially big on the DRIP front.
In recent years, some companies that run DRIPs have changed their practices in order to discourage shareholders who only purchase small amounts of stock, though most companies still allow minimal monthly investments as low as $10, with the average required minimum investment being around $25 to $50.
At the same time these companies have often allowed for direct investment in the company without needing to own a share to begin with, as long as you bought five or more shares from the outset, allowing them to call this an improvement. However, given that enough in the way of fees were levied by some of the chief culprits to dissuade shareholders from ever buying small amounts of stocks, these plans served to lock out many investors who lacked the financial resources to make $500 or $1000 purchases on a regular basis.
Hopefully as information technology advances to make administering the plans cheaper, this will change. Companies must become more attuned to the idea that a stable base of long-term owners encouraged not to trade due to the time-delay and fees associated with closing a DRIP account helps keep the share price stable and provides a real value to all of the owners of the company, regardless of the expense of running the DRIP.
