What Is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan, or DRIP, automatically uses your cash dividends to buy more shares of the same stock instead of paying you in cash. It is the simplest way to compound dividend income.
How it works
Each time a dividend is paid, the plan immediately reinvests it into additional shares — often including fractional shares — at the prevailing price. Those new shares then earn dividends of their own, so the position grows on its own without further contributions.
Reinvestment can run through the company's own plan or, more commonly today, through a brokerage that offers automatic reinvestment at no commission.
Why it matters over time
Compounding is the entire appeal. Over long horizons, reinvested dividends can account for a large share of a stock's total return, because each reinvested payment enlarges the base that generates the next one.
The trade-off is that you receive no spendable cash while reinvesting, and reinvested dividends are generally still taxable in the year they are paid even though you never saw the money. To model the long-run effect, use the DRIP calculator.