Dividend reinvestment plan

What it means

A dividend reinvestment plan, usually called a DRIP, automatically uses your dividend payments to buy more shares of the same stock instead of paying you cash. Each payout purchases additional shares, often including fractional shares, so the next dividend is calculated on a slightly larger holding. Over years, this compounding quietly builds the position without any action from the investor.

Some companies run their own DRIPs and have historically offered small perks such as discounted share prices or waived commissions on the reinvested purchases. Many brokers also offer synthetic DRIPs that do the same thing automatically for any dividend-paying stock in the account. Enrollment is usually a one-time setting per holding.

DRIPs suit long-term investors who do not need the income today and want their dividends working immediately. The tradeoff is that you still owe tax on reinvested dividends in taxable accounts, since the tax code treats them as received income even though you never saw cash.

An example

For illustration, you own shares paying a $50 quarterly dividend. With a DRIP enrolled, that $50 automatically buys 0.6 more shares at the market price, so next quarter's dividend is paid on your original shares plus the 0.6.

Related terms

Dividend yield, Ex-dividend date, Payment date, Brokerage account