Dividend Reinvestment Plan (DRIP)
A program that automatically reinvests cash dividends into additional shares of the same stock, often without commissions and sometimes at a discount.
What is DRIP?
A Dividend Reinvestment Plan (DRIP) allows shareholders to automatically reinvest their cash dividends into additional shares of the paying company rather than receiving the dividend as cash. Many company-sponsored DRIPs offer shares at a 1–5% discount to market price and charge no brokerage commission, making them particularly attractive for long-term investors seeking to compound their holdings. Fractional shares are typically issued when dividend amounts don't divide evenly into whole share prices. Brokerage-sponsored DRIPs offer similar automatic reinvestment but usually at market price without a discount. Dividends reinvested through a DRIP are still taxable in the year received, even though no cash is distributed — investors must track the cost basis of each reinvestment to calculate capital gains accurately when selling. DRIPs exemplify the power of compounding: reinvesting dividends over decades can significantly multiply total returns.
Example
An investor owns 100 shares of Coca-Cola (KO) trading at $60, with a quarterly dividend of $0.485/share. Without a DRIP, the investor receives $48.50 in cash each quarter. With a DRIP, the $48.50 buys approximately 0.808 additional shares at $60, increasing the holding to 100.808 shares — which then earns a slightly higher next dividend. Over 20 years, this compounding effect materially increases total return above the dividend-cash scenario.
Source: Investopedia — DRIP