What is a DRIP and how does it work?
A DRIP (Dividend Reinvestment Plan) automatically uses each dividend payment to buy more shares of the same security, including fractional shares, with no commission. Every reinvestment increases the share count, which increases the next dividend — compounding the income stream. Over 20–30 years, reinvested dividends typically generate the majority of total return.
DRIPs work by routing every cash dividend straight back into more shares of the company that paid it, at the price on the pay date. Most US brokers offer DRIP enrolment for free at the position level — you toggle it on per ticker.
The mathematical effect is exponential rather than linear. If you own 100 shares of a stock paying $4 per share annually, the first year you receive $400. If that buys 4 new shares, the next year's dividend (assuming the rate is held) is paid on 104 shares — $416. Over 20 years at a 3% yield and zero dividend growth, the share count grows by about 80%. Add 5% annual dividend growth on top and the income roughly triples.
DRIPs are not always optimal. Investors who need the income in retirement, who want to rebalance into different names, or who use a broker that charges per reinvestment may prefer to take dividends as cash. The right choice is portfolio- and life-stage-dependent.
- Reinvests dividends automatically — no manual buying required
- Includes fractional shares, with no commission at most brokers
- Compounds share count → bigger dividend next time
- Best for accumulation-phase investors with a 10+ year horizon
- Turn off in retirement if you need the cash flow
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