The credit crunch appears to be increasing the number of dividend reinvestment plans as companies struggle to raise new capital.

DRPs have long been popular with many smaller shareholders. They give investors the opportunity to receive their dividend in extra shares, usually at a discount to the market price.

This is attractive to investors who bought shares for capital appreciation or as part of a long-term portfolio and who have no immediate need for the dividend income. It allows them to buy, at a discount, more shares in a company they already like.

But DRPs are diluting because they increase the number of shares in the company; investors who take their dividend in cash then own a smaller proportion of the company. At times, institutional investors have spoken out against these schemes for this reason.

As a result, some companies have introduced a DRP only when they need more capital. This is what seems to be occurring now.

An example is Westfield Group, which in mid-November announced it would reactivate its DRP from February. The company hopes to raise $1 billion in February and a further $1 billion in August.

Fat Prophets funds management and market information company analyst Colin Whitehead says: "DRPs are in effect a quasi-capital raising. So we are going to see a lot more of them. That is pretty indicative of the market's need for equity capital at present.

"We have got corporate credit markets still very tight and equity is really the easiest source of funding at the moment.

"DRPs are a good way of doing it because you can raise capital while also creating the illusion that you are maintaining your dividend."

The senior client adviser and strategist at Austock Securities, Michael Heffernan, says: "My philosophical view on DRPs is that I have always been a bit of a sceptic. I believe it is better for investors to maintain their options and take the cash and then decide whether they want to continue to invest in that company or invest somewhere else.

"The inducement of a small discount to the current market price is not really a sufficient reason in my book for people to do it. And the fact that you save a bit of brokerage is a bagatelle. You are saving 1 per cent brokerage . . . but the stock could fall 3 per cent in a day.

"Some clients ring up and ask whether a particular company has a DRP because they are obviously keen on them. I have to say that companies can turn them on and turn them off. Because a company has one now does not mean it is always going to have it."

One controversial feature of the recent trend towards DRPs is a growing number of underwritten schemes, whereby a company pays an underwriting fee to guarantee the shares will be taken. Some of the large banks have announced underwritten DRPs.

The managing director of The Intelligent Investor newsletter, Steve Johnson, says: "It is not even really a dividend. It is a de facto capital raising . . . All they are doing is paying the underwriter a fee, issuing a whole heap more shares and diluting anyone who does not participate in the underwritten DRP. That is the net result of the transaction. It maintains the illusion that they are keeping their dividend, which I guess they think is important."

In a note to subscribers concerning underwritten DRPs, The Intelligent Investor writes: "If the shares are cheap then by all means participate. Otherwise, you are probably best off taking the cash.

"Just keep in mind that the companies are having their DRPs underwritten because they need the cash - a potential red flag."