Dividend Reinvestment PlanDRIP
A dividend reinvestment plan (DRIP) automatically uses your cash dividends to buy more shares of the same company or fund. Over time this compounds your holding, and many plans are commission-free, sometimes with a discount on the share price.
When a company pays a dividend, you can take the cash or put it straight back to work. A DRIP does the second automatically, buying more shares — often fractional ones — every time a dividend is paid. It is one of the simplest ways to let compounding do its work. This entry explains how DRIPs operate, the types and the trade-offs.
- Category
- Trading Basics
- Reading time
- 3 min
- Also called
- DRIP, DRP, Dividend reinvestment
- Updated
DRIPs in plain words
A DRIP lets shareholders automatically reinvest cash dividends in more shares of the company on the payment date.1
These plans are typically commission-free and may offer a discount to the current share price.1
In short, dividends go back into the stock of the company that paid them instead of to your bank account.2
How a DRIP works, step by step
Enrol
Through the company or your broker.
The company pays a dividend
On the payment date. See Ex-Dividend, Record and Payment Dates.
Cash is reinvested
Buying more shares automatically.
Fractional shares are allowed
Every cent is used. See Fractional Shares.
Holdings grow
More shares earn more dividends next time.
Keep records
Each purchase adds to your cost basis. See Cost Basis.
Worked examples
Example 1 — One reinvestment
+2.5 sharesYou own 200 shares. The dividend is $0.50 a share and the price is $40.
| Dividend received | 200 × $0.50 = $100 |
| Shares bought | $100 ÷ $40 = 2.5 |
| New holding | 202.5 shares |
The cash dividend is automatically turned into additional shares on the payment date.1
Example 2 — With a discount
≈ 2.58 sharesSame dividend of $100, but the plan offers a 3% discount on the $40 price.
| Discounted price | $40 × 0.97 = $38.80 |
| Shares bought | $100 ÷ $38.80 ≈ 2.58 |
Some company plans offer a discount to the current share price.1
Example 3 — Compounding over time
≈ +$16,800 extraA $10,000 holding yields 3% and the price grows 4% a year. Compare 20 years with and without reinvesting.
| Reinvested (≈7%/yr) | $10,000 × 1.07^20 ≈ $38,697 |
| Price only (4%/yr) | $10,000 × 1.04^20 ≈ $21,911 |
Reinvested dividends buy shares that earn their own dividends, which compounds growth. See Compound Interest.
DRIP vs taking cash dividends
| Aspect | DRIP | Cash dividends |
|---|---|---|
| Dividends used for | More shares | Spending or other investments |
| Compounding | Automatic | Manual |
| Diversification | Concentrates in one stock | Flexible |
| Tax (taxable accounts) | Still taxed when paid | Taxed when paid |
Who uses DRIPs
Long-term investors
Building positions over decades. See Time Horizon.
Dividend growth investors
Compounding rising payouts. See Dividend Aristocrats.
Small investors
Fractional shares make every dollar work.
Fund investors
Automatic reinvestment in mutual funds and ETFs. See Exchange-Traded Fund.
Advantages and disadvantages
Advantages
- Automatic compounding.
- Usually commission-free.
- Buys fractional shares.
Disadvantages
- Concentrates money in one holding.
- Dividends are still taxable in taxable accounts.
- Many small purchases complicate cost-basis records.
Going deeper
Read as far as you need. Each level builds on the one before it.
Types of plans
Beginner
A common type is the company-operated plan, where a dedicated department handles the whole programme; brokers also offer automatic reinvestment.1
Taxes still apply
Intermediate
In taxable accounts, reinvested dividends are generally taxed as if you received the cash. See Taxable Event.
Wash sale interaction
Advanced
An automatic reinvestment within 30 days of selling the same stock at a loss can trigger a wash sale. See Wash Sale Rule.
Common mistakes
Forgetting taxes
Reinvested dividends are still income.
Never rebalancing
One stock can grow too large. See Rebalancing.
Losing track of basis
Each purchase changes your cost basis.
Reinvesting into a declining company
Review holdings periodically.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A DRIP reinvests dividends into more shares automatically.
- It is usually commission-free, sometimes discounted.
- It compounds holdings over time.
- Taxes still apply in taxable accounts.
- Watch concentration and cost-basis records.
Frequently asked questions
Is a DRIP a good idea?
Can I stop a DRIP?
Do ETFs have DRIPs?
Further learning
- Compound Interest
The engine behind DRIPs.
- Dividend Yield
How much the dividend pays.
- Dividend Aristocrats
Popular DRIP candidates.
- Wash Sale Rule
A tax trap with automatic purchases.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Dividend Reinvestment Plan (DRIP) (opens in a new tab) Checked .
- Corporate Finance Institute. DRIP (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.