Dividend Reinvestment Plan (DRIP)
What Is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan (DRIP) allows investors to automatically reinvest cash dividends into additional shares of the same stock or fund instead of receiving the dividends as cash.
Many companies and brokerage platforms offer DRIP programs.
Why It Matters
Dividend reinvestment can accelerate portfolio growth through compounding. By purchasing additional shares, investors increase the number of shares that generate future dividends.
Over time, this strategy can significantly increase the total value of an investment.
How a DRIP Works
When a company pays dividends, investors enrolled in a DRIP automatically use the dividend payment to purchase additional shares.
These purchases may include fractional shares, allowing investors to reinvest the full dividend amount.
Some DRIPs may offer reduced fees or discounted share prices.
Example
An investor owns 100 shares of a dividend-paying stock that pays $1 per share annually. Instead of receiving $100 in cash, the dividend is automatically used to buy additional shares.
DRIP vs Cash Dividend
- A DRIP reinvests dividends into additional shares.
- A cash dividend pays the dividend directly to the investor.
FAQs About DRIPs
Do DRIPs cost extra?
Some programs are free, while others may charge small fees.
Can investors stop a DRIP?
Yes. Investors can usually opt out at any time.
Are DRIPs taxable?
Dividends may still be taxable even when reinvested.
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