DRIP (Dividend Reinvestment Plan)
Definition
A program that allows investors to automatically reinvest cash dividends into additional shares of the same stock, often without commissions and sometimes at a discount.
A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to purchase additional shares (or fractional shares) of the stock that paid them. Instead of receiving a $50 quarterly dividend as cash, a DRIP uses that $50 to buy more shares.
DRIPs harness the power of compound growth. By reinvesting dividends, you own more shares, which generate more dividends, which buy more shares — creating an accelerating cycle. Over long periods, dividend reinvestment accounts for a massive portion of total stock market returns: from 1960-2023, dividends and their reinvestment accounted for roughly 85% of the S&P 500's total return.
Most brokerages offer automatic DRIP enrollment for any dividend-paying stock or fund. Some companies also offer direct DRIPs that let you buy shares directly, sometimes at a 1-5% discount to market price and with no commission.
The main consideration is tax: reinvested dividends are still taxable income in the year received (in taxable accounts). You don't get a tax break for reinvesting — the IRS treats it identically to receiving cash. This makes DRIPs most powerful in tax-advantaged accounts (IRA, 401k) where you won't owe annual taxes on the dividends.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Frequently Asked Questions
Should I use a DRIP or take dividends as cash?
If you're in the accumulation phase (building wealth), DRIPs are generally better — they automate compounding. If you're in retirement or need income, taking dividends as cash provides spending money. In taxable accounts, remember that reinvested dividends are still taxed.
Do DRIPs create tax complications?
Yes — each reinvestment creates a new tax lot with its own cost basis and purchase date. When you eventually sell shares, you need accurate records of every reinvestment to calculate capital gains correctly. This is where Clarity's cost basis tracking helps.