What Is a Dividend Reinvestment Plan?
A DRIP, or dividend reinvestment plan, automatically uses your dividends to buy more shares of the same stock or fund instead of paying you cash.
How a DRIP works
You own 100 shares and receive a $50 dividend. Instead of landing as cash, the $50 buys more shares right away, often including fractional shares. Next time, you earn dividends on more shares.
Why it helps
It puts compounding on autopilot. More shares bring more dividends, which buy more shares. Over decades, reinvested dividends have made up a large part of total stock market returns.
Things to know
In the US, reinvested dividends in a taxable account are still taxed that year, even though you never saw the cash. Most brokers let you switch DRIP on for free.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
DividendCash a company pays its owners.
Compound interestGrowth that earns more growth.
Dividend investingBuilding income from dividend stocks.
Fractional sharesOwning part of one share.
Dividend yieldYearly dividend as a percent of the share price.
Buy and holdBuying good investments and keeping them for years.