What is a DRIP?
A DRIP (Dividend Reinvestment Plan) is a program that automatically uses your dividend payments to purchase additional shares of the same stock or fund. Instead of receiving cash dividends in your account, those dividends buy more shares—including fractional shares.
Think of it as putting your money on autopilot: every dividend payment works for you, buying more shares that generate more dividends, which buy even more shares, and so on. This creates a powerful compounding effect over time.
Simple Example
You own 100 shares of a stock paying $1/share annually in dividends. With DRIP enabled and stock at $50, your $100 dividend buys 2 more shares. Next year, you have 102 shares generating $102 in dividends, buying 2.04 shares. The snowball keeps growing.
How DRIP Works
The Basic Process
- Company declares dividend: The company announces a dividend payment
- Record date: If you own shares on this date, you're entitled to the dividend
- Payment date: Instead of cash, your dividend automatically purchases more shares
- Fractional shares: If your dividend doesn't buy a whole share, you receive partial shares
- Repeat: New shares generate dividends, which buy more shares
Enabling DRIP
Most brokers make enabling DRIP simple:
- Broker DRIP: Toggle on in account settings—usually applies to all holdings or select stocks
- Company DRIP: Enroll directly with the company's transfer agent (more paperwork)
- Selective DRIP: Some brokers let you enable DRIP for specific holdings only
The Power of Compounding
The real magic of DRIPs is compound growth—earning returns on your returns. Over decades, reinvested dividends can contribute significantly to total wealth.
Without DRIP
Dividends taken as cash
Starting: $10,000
With DRIP
Dividends reinvested
Starting: $10,000
+$98,371 more!30-year projection assuming 3% dividend yield and 7% annual growth
Historical Impact
Studies show that over long periods (1930-2020), reinvested dividends accounted for approximately 40% of the S&P 500's total return. Skipping dividend reinvestment means missing a huge portion of potential gains.
Types of DRIPs
Broker DRIP
The most common type—enabled through your brokerage account settings.
- Easy to enable/disable
- Works for most stocks and ETFs
- Fractional shares supported
- No fees at most brokers
Company DRIP
Offered directly by some companies through their transfer agent.
- Sometimes offers discount (1-5%)
- May have lower minimums
- More paperwork to set up
- Holdings separate from brokerage
Synthetic DRIP
Broker collects dividends and buys shares on your behalf.
- May not occur on exact payment date
- Broker buys at market price
- Most flexible option
- Works for any dividend stock
DRIP Pros and Cons
Advantages
- Automatic compound growth
- No transaction fees
- Fractional share purchases
- Dollar-cost averaging effect
- Removes emotion from investing
- Hands-off wealth building
- Some company DRIPs offer discounts
Disadvantages
- Taxable even without cash received
- No control over purchase timing
- May increase position concentration
- Complicates cost basis tracking
- Can't redirect dividends elsewhere
- Not ideal if you need income
- Might buy at high prices
When to Use DRIP
- Long-term investors: Planning to hold 10+ years—let compounding work
- Accumulation phase: Building wealth, don't need current income
- Tax-advantaged accounts: IRA/401(k) where no annual tax on dividends
- High-conviction holdings: Stocks you want to own more of
When to Skip DRIP
- Retirement income: Need dividends for living expenses
- Rebalancing: Want to direct dividends to underweight assets
- Overweight positions: Already too much in one stock
- Tax planning: Need cash to pay dividend taxes in taxable accounts
DRIP Tax Implications
Important Tax Considerations
Dividends are taxable when received even if reinvested—you don't receive cash but still owe tax. Track cost basis carefully: each DRIP purchase has its own cost basis and holding period. Consider holding dividend stocks in tax-advantaged accounts.
Cost Basis Tracking
Each DRIP purchase creates a new tax lot with its own:
- Purchase date: Determines short-term vs. long-term capital gains when sold
- Cost basis: The price paid (dividend amount) for those shares
- Number of shares: Including fractional shares
Automatic Tracking
AllInvestView automatically tracks DRIP purchases and calculates cost basis for each tax lot, making tax time much simpler.
Frequently Asked Questions
Track Your DRIP Investments
AllInvestView automatically tracks your dividend reinvestments, calculates cost basis for each purchase, and shows how compounding is growing your wealth.
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