I have my (Vanguard) brokerage account set to "Reinvest Dividends", an option I selected when I opened it brand new. And ever since then, every stock I own that pays dividends, has resulted in fractional shares. But I was wondering today what Vanguard does if I bought dividend-paying stock in a company that doesn't offer fractional shares? Does that even exist, and if so, what would Vanguard do with the dividend?
Vanguard has enough customers that are also reinvesting dividends so that when dividends are paid they simply buy more shares on the open market and keep track of how many fractional shares everybody owns.
How does the reinvestment program work?
When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase can't be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services.