Dividend Reinvestment Plan (DRIP)

DRIPs are offered by many companies, brokers and funds. Each time a dividend is paid, it is used to buy additional shares, often including fractions of shares, usually without trading commissions.

For example, an investor receives a dividend of 400 on a share trading at 40. Under a DRIP, the dividend buys 10 more shares. Over time, the growing number of shares produces larger dividends, which buy still more shares, compounding the investment.

Some company-run plans offer shares at a small discount to the market price. DRIPs are a simple way to keep money invested and to build a position gradually, which is similar to regular investing.

Reinvested dividends are usually still taxable in the year they are paid, even though no cash is received, so investors in taxable accounts need to keep records for tax and cost basis purposes. Reinvesting automatically can also leave a portfolio increasingly concentrated in one holding.