Dividend Reinvestment Plan (DRIP)

With a dividend reinvestment plan, you do not receive your dividends as cash. Instead, each payment is used to buy additional shares, often including fractional shares, of the same company or fund. Over time, those extra shares produce their own dividends, which are reinvested again. This is a simple way to put compounding to work.

DRIPs are offered in two main ways. Many brokers let you switch on automatic reinvestment for any eligible stock or ETF in your account, usually without commission. Some companies also run their own plans through a transfer agent, occasionally offering shares at a small discount.

Reinvesting has a few practical points to keep in mind. In a taxable US account, reinvested dividends are generally still taxed in the year they are paid, even though you never received the cash. Each reinvestment creates a new purchase with its own cost basis, which matters when you sell.

Example: you own 100 shares at $50 that pay a $2 annual dividend. Instead of $200 in cash, you receive four new shares. Next year, you collect dividends on 104 shares.