DRIP Investing
Dividend Reinvestment Plan
Dividend reinvestment plans, often called DRIPs, are a powerful tool for investors looking to accelerate their portfolio’s growth. By automatically using your cash dividends to purchase more shares of the same stock, you can harness the power of compounding. This “set it and forget it” strategy ensures every dollar of your earnings is put back to work, generating its own returns over time. It’s a simple yet effective way to build wealth and grow your holdings exponentially.
A dividend reinvestment plan is a simple yet effective way to build wealth and grow your holdings exponentially. To learn more about how DRIPs fit into a broader strategy, visit our comprehensive guide on dividend investing and income.
What is a DRIP?
Instead of receiving your dividend payment in cash, it is automatically reinvested back into shares. In other words, DRIPS allow you to consistently drip money back into your investment.
Creating Compounding Dividends
The biggest benefit of a dividend reinvestment is compounding growth. By putting your money back to work quickly and consistently with more shares after each payment, your next dividend is automatically larger, assuming the per-share amount doesn’t change.
Automatic Investing
A DRIP requires minimal maintenance, so it can truly be a “set it and forget it” investment. A dividend reinvestment plan enables you to automatically invest each new dividend payment. With most brokers supporting fractional shares, all the dividend payments can be put to work immediately.
DRIP Investing
A dividend reinvestment plan (DRIP) removes emotion from your investment strategy, which can significantly improve your returns. The automated process prevents common behavioral mistakes like panic-selling in a down market or hesitating to buy when prices are low.
By consistently reinvesting, you automatically take advantage of market dips. This strategy, known as dollar-cost averaging, allows your dividends to purchase more shares when they are cheap, lowering your average cost per share and boosting long-term growth.
Frequently Asked Questions
Common Questions about Dividend Reinvestment Plans
Q. Do I pay commissions with DRIP investments?
No, you almost never pay commissions. When you enable dividend reinvestment through a major brokerage firm, the service is typically offered for free. For any stocks or ETFs you own, the broker will automatically use your cash dividends to buy additional shares without charging you a commission or fee.
Q. Do I pay taxes on dividend reinvestments?
Yes, you still have to pay taxes on reinvested dividends in the year they are paid, assuming the investment is held in a standard, taxable brokerage account. If your dividend-paying stocks are held within a tax-advantaged retirement account, such as a Roth IRA or Traditional IRA, the rules are different. In these accounts, dividends can be reinvested without creating a taxable event for that year.
Q. Can I buy fractional shares?
Yes, nearly all major brokers support the ability to buy fractional shares. Their systems are designed to automatically buy fractional shares and will show them in your account, often calculated to three or four decimal places (e.g., 123.4567 shares).
Automatic Investing
Dividend Reinvestment Plans
DRIPS automatically use your dividends to buy more stock—including fractional shares—often without commissions. This strategy leverages dollar-cost averaging and removes emotion from your investing decisions. While these dividends are still taxed annually in regular brokerage accounts, the process is a powerful way to compound growth over time.