Financial Term Explorer
DRIP (Dividend Reinvestment Plan)
Automatically reinvest your dividends to buy more shares, turning dividend payments into a powerful compounding machine that builds wealth while you sleep.
đź“ť Definition
**DRIP (Dividend Reinvestment Plan)** is a program that automatically uses dividend payments to purchase additional shares of the same stock. Many companies offer direct DRIPs with no commission and sometimes at a slight discount. Most brokerages also offer automatic reinvestment options.
In Simple Terms
Instead of receiving your $50 dividend as cash, DRIP automatically uses it to buy 0.83 more shares (at $60/share). Those new shares then earn their own dividends, which buy more shares... It's like setting up a snowball machine that grows your investment without you lifting a finger.
Example
If you invested $10,000 in Coca-Cola in 1990 with DRIP enabled, you'd have over $200,000 today. The same investment without reinvestment would be worth about $60,000. That's the power of compound reinvestment over 30+ years.
đź’ˇ Practical Tips
- 1Enable DRIP while in the accumulation phase—switch to cash dividends when you need income in retirement.
- 2Company-direct DRIPs may offer discounts, but brokerage DRIPs offer more flexibility.
- 3Keep records of reinvested shares for accurate cost basis tracking at tax time.
⚠️ Common Mistakes
Enabling DRIP in taxable accounts without considering the tax implications—you still owe taxes on reinvested dividends.
âť“ Frequently Asked Questions
Can I DRIP fractional shares?â–Ľ
Yes, most modern brokerages allow fractional share purchases through DRIP, ensuring every penny works for you.
Should I DRIP all my dividend stocks?â–Ľ
Consider your goals. During accumulation, DRIP everything. In retirement, you might want cash from some positions while DRIPing others.