DRIP (Dividend Reinvestment Plan)
Definition
A program that automatically reinvests cash dividends into additional shares of the same stock or fund, compounding returns without requiring manual purchases.
A Dividend Reinvestment Plan, commonly called a DRIP, automatically uses your dividend payments to buy more shares of the stock or fund that paid the dividend. Instead of receiving cash, you accumulate additional shares, which then generate their own dividends, creating a compounding effect.
Most brokerages offer free DRIP enrollment for any dividend-paying security in your account. The reinvestment typically happens automatically on the dividend payment date, often allowing fractional shares so every dollar of dividend is immediately reinvested.
The compounding power of DRIPs is significant over long periods. If a stock yields 3% and grows 7% annually, reinvesting dividends roughly doubles the total return over 20 years compared to taking dividends as cash. This "dividend compounding" is one of the most powerful forces in long-term wealth building.
Some companies offer direct stock purchase plans (DSPPs) that include DRIP features, sometimes at a discount to the market price. These company-sponsored DRIPs allow you to buy shares directly from the company and reinvest dividends without brokerage fees.
The tax consideration is important: even though you're reinvesting dividends (not receiving cash), the dividends are still taxable income in the year received. Each DRIP reinvestment also creates a new tax lot with its own cost basis and holding period, which can complicate tax reporting for accounts with many reinvested dividends.
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Frequently Asked Questions
Should I enroll in DRIP?
For long-term accounts (retirement, long-term taxable), DRIP is almost always beneficial due to compounding. For income-focused accounts where you need the cash, taking dividends may be preferable. In taxable accounts, DRIP creates many small tax lots which can complicate tax reporting.
Are reinvested dividends still taxable?
Yes. Whether you reinvest or take dividends as cash, they're taxable in the year received. DRIP doesn't change the tax treatment — it simply automates the reinvestment. Each reinvestment creates a new tax lot with the current date and price as its cost basis.