This study investigates whether firm dividend payout choices are influenced by the presence of a Dividend Reinvestment Plan (DRIP). Given that DRIPs help retain capital, we show that dividend-paying firms with a DRIP will tend to pay a high dividend and maintain a stable payout policy. Using a multinomial logistic model, we show that in comparison to REITs without DRIPs, REITs with DRIPs have a higher payout ratio and are less likely to: (1) pay regular dividends with extra dividends and share repurchases, (2) distribute extra dividends, repurchase shares, yet omit regular dividends and (3) omit all payouts. In addition, we find that REITs with a capital-retaining DRIP invest more aggressively and such increased investment activities are undertaken without raising the reliance on external financing.

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This paper investigates equity issuances through dividend reinvestment and stock purchase plans (DRSPPs). Using a unique sample collected from security registration filings, we show that firms can issue new shares through DRSPPs without using underwriters and consequently, save a large part of direct costs. This economical form of equity offering helps high dividend paying firms retain a substantial amount of cash flow from operations. With this innovative strategic practice of capital‐raising, we provide direct evidence showing that the pecking order still drives firms' financing. Furthermore, equity offerings via DRSPPs can avoid negative stock market reactions around the issuance date.