DRIP
Quick definition: A DRIP, or dividend reinvestment plan, automatically uses your dividends to buy more shares instead of paying them out as cash.
In plain English
With a dividend reinvestment plan (DRIP), each dividend buys more shares of the same stock or fund, often including fractions of a share. More shares mean larger dividends next time, which buy even more shares.
Example
You own 100 shares priced at $50 and receive a $100 dividend. Instead of cash, you get 2 more shares. Next time you are paid on 102 shares.
Why it matters
Reinvesting is how dividends compound. Over decades the extra shares can make a large difference, especially when the company also raises its dividend.
Common mistakes
- Forgetting taxes. In many countries reinvested dividends are still taxable income in the year you receive them.
- Reinvesting automatically into a company you no longer want to own more of.
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