What Is a DRIP (Dividend Reinvestment Plan)?
A DRIP automatically uses your dividends to buy more shares instead of paying you cash. Those new shares earn dividends too, so your income snowballs. Over 20 years it can nearly double what you end up with.
By Bogdan · Updated
When a company pays a dividend, you can take the cash — or use it to buy more shares. A DRIP does the second, automatically.
Explain it like I’m 5
Imagine you have a chicken that lays eggs. You could eat the eggs. Or you could let them hatch into more chickens — which lay more eggs, which hatch into even more chickens.
Reinvesting dividends is letting the eggs hatch. At first it’s a small difference, but after many years you have a whole farm.
Compare reinvesting with taking cash, year by year, using the dividend calculator — turn DRIP on and off.
How it works
- A stock or fund you own pays a dividend.
- Instead of landing in your account as cash, it buys more shares — often fractional shares, with no commission.
- Next time, you get dividends on those extra shares too.
How much it adds
$10,000 invested, 3.5% dividend yield, share price growing 5% a year, over 20 years (before tax):
| With DRIP | Without DRIP | |
|---|---|---|
| Value of shares | ~$51,100 | ~$26,500 |
| Cash dividends collected | $0 | ~$11,600 |
| Total | ~$51,100 | ~$38,100 |
Reinvesting adds about $13,000 — roughly a third more — and the gap keeps widening the longer you hold.
Pros
- Compounding on autopilot.
- No commissions and fractional shares, so every cent is invested.
- Dollar-cost averaging: you buy more shares when prices are low.
Cons
- Taxes still due each year in a taxable account, even though you got no cash.
- Concentration: a DRIP keeps buying the same stock, which can make one holding too big.
- More record-keeping: every reinvestment is a small purchase with its own cost basis (your broker usually tracks it).
When to take the cash instead
- You need the income — for example, in retirement (see the 4% rule).
- You want to rebalance by putting the cash into other investments.
- A holding is already too large a share of your portfolio.
New to dividends? Start with how dividends work.
Frequently asked questions
What does DRIP stand for?
Dividend reinvestment plan. Instead of paying your dividends as cash, it uses them to buy more shares of the same stock or fund — usually automatically, with no fee, and including fractional shares.
Is it better to reinvest dividends or take cash?
If you don’t need the income, reinvesting usually builds more wealth because of compounding. Taking cash makes sense in retirement, when you need the income, or if you’d rather invest the money somewhere else to rebalance.
Do you pay tax on reinvested dividends?
Yes, in a taxable account. Reinvested dividends are taxed the same as if you received cash. Each reinvestment also adds to your cost basis, so keep records to avoid paying tax twice when you sell. In an IRA or 401(k), there’s no tax each year.
How do I set up a DRIP?
Most brokers have a setting to reinvest dividends — for all holdings or one at a time. Some companies also run their own DRIPs directly through a transfer agent.
How much difference does reinvesting dividends make?
A lot over long periods. $10,000 in a stock yielding 3.5% with 5% yearly price growth grows to about $51,000 in 20 years with reinvestment, versus about $38,000 (shares plus cash collected) without.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.