DRIP

Dividend Reinvestment Plan — a program that automatically uses dividend payments to purchase additional shares of the same stock, often at no commission and sometimes at a discount.

DRIPs allow investors to compound their ownership over time without taking any action. Each dividend payment, instead of arriving as cash, is used to buy fractional shares of the paying company. Over years and decades, this automatic reinvestment can meaningfully increase total returns through the power of compound growth, especially in companies that steadily increase their dividends.

Many companies offer direct DRIPs administered by their transfer agent, sometimes including a 2–5% discount to market price and no transaction fees. Brokerages also offer synthetic DRIPs that automatically reinvest dividends for any stock in your portfolio at the current market price, regardless of whether the company runs its own program.

DRIPs are a powerful tool for long-term, buy-and-hold investors who don't need current income. The main accounting nuance is that each reinvested dividend creates a new tax lot with its own cost basis and purchase date, which can complicate tax reporting. Each reinvestment is also a taxable event in a taxable account — you owe taxes on the dividend even though you didn't receive cash.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.