Dividend And Income Investing · Beginner · 7 minute read · No ads
Dividend Reinvestment Plan (DRIP)
Also called DRIP, dividend reinvestment, automatic dividend reinvestment
A dividend reinvestment plan (DRIP) uses an eligible cash dividend to buy more shares automatically. If a $50 dividend is reinvested at $50 per share, it buys 1 additional share. A holding of 100 shares becomes 101 shares before any later market movement, fees or taxes.
Key takeaways
- A DRIP automatically uses eligible cash dividends to purchase additional shares.
- Fractional shares can allow the full payment to be invested when the platform supports them.
- Reinvestment can compound ownership, but it also increases exposure to the same investment.
- In a US taxable account, reinvested dividends generally remain reportable income and each purchase needs cost basis records.
What is a dividend reinvestment plan?
A dividend reinvestment plan, or DRIP, automatically uses an eligible cash dividend to buy additional shares instead of paying the cash into the account. Depending on the plan or broker, purchases may include fractional shares and may carry fees.
Reinvestment can compound ownership over time, but it does not guarantee a gain and generally does not make a taxable dividend tax free in a US taxable account.
How Dividend Reinvestment Plan (DRIP) works
| Step | What happens |
|---|---|
| 01 · Check eligibility | Confirm the security and account support reinvestment. |
| 02 · Read the plan terms | Review timing, price method, fees, discounts and fractional shares. |
| 03 · Reinvest the payment | The eligible dividend is applied to a share purchase. |
| 04 · Record the new lot | Track purchase date, shares, price, basis and tax information. |
The formula
New shares purchased = Dividend available for reinvestment ÷ Purchase price per share
Dividend available = the eligible distribution after any fee or withholding Purchase price = the price used by the plan or broker New shares purchased = full and fractional shares credited to the account
A worked DRIP example
An investor owns 100 shares and receives an eligible $50 cash dividend. The DRIP buys shares at $50 each, so $50 ÷ $50 = 1 new share.
The account now holds 101 shares. If the purchase price were $40 and fractional shares were supported, the same $50 could buy 1.25 shares. Future results depend on later dividends, prices, fees, taxes and business performance.
Why it matters
Automatic reinvestment can put income back to work without a separate trade and can build share ownership through repeated purchases. The tradeoff is less cash income and greater concentration in the same company or fund.
Use the Dividend Reinvestment Calculator to test educational scenarios. For broader research, use the Stock Screener and then confirm the plan terms, fees and tax reporting with the provider.
Start with the dividend itself
Review how declared payments, eligibility dates and cash amounts work before modeling reinvestment.
- Free educational tool
- Scenario based
- No return guarantee
Building your investing foundation? Start the free course
How reinvestment works
The company, fund, transfer agent or broker credits a dividend and uses the eligible amount to purchase more shares. The purchase price and timing depend on the plan. Some plans support fractional shares, while others hold cash until enough is available for a full share.
Company plans versus brokerage reinvestment
A company sponsored DRIP may operate through a transfer agent and may permit optional cash purchases. A broker can offer account level reinvestment for many eligible securities. Fees, discounts, enrollment rules and fractional share treatment vary.
Compounding and concentration
Reinvestment can increase the number of shares that may receive future dividends, creating a compounding effect if distributions continue. It also directs more money into the same holding, so investors should monitor diversification and business risk.
Taxes and cost basis
The IRS explains that using dividends to buy more stock generally does not remove the income reporting requirement in a taxable account. Each reinvestment creates a new purchase lot with its own cost basis and holding period. Keep records even when the process is automatic.
When cash may be more useful
An investor may prefer cash for spending, rebalancing, taxes or buying a different investment. Reinvestment is a setting, not a judgment about valuation. A DRIP can buy shares when they are expensive as well as when they are cheap.
Comparison
| Choice | What happens to the dividend | Main tradeoff |
|---|---|---|
| Take cash | Cash stays available in the account | Flexible, but not automatically invested |
| Use a DRIP | Eligible dividend buys more of the same holding | Automatic compounding, but more concentration |
| Reinvest manually | Investor chooses when and where to invest | More control, but requires action |
Check yourself
A $50 dividend is reinvested at $50 per share. How many new shares are purchased?
$50 divided by a $50 purchase price equals 1 new share.
Show the answer
1 share
Things people get wrong
Mistake 01 Assuming reinvestment is tax free
Taxable income may still be reportable even when no cash is withdrawn.
Mistake 02 Ignoring cost basis records
Each purchase can create a separate lot for a future sale.
Mistake 03 Treating automation as a valuation decision
A DRIP keeps buying unless settings change, regardless of price or concentration.
Questions people ask about Dividend Reinvestment Plan (DRIP)
What does DRIP stand for?
Dividend reinvestment plan.
How does a DRIP buy shares?
It applies an eligible distribution to full or fractional shares under the provider's terms.
Are DRIPs free?
Some are free, while others may have fees or different purchase price methods.
Can a DRIP buy fractional shares?
Many plans and brokers do, but the feature depends on the provider and security.
Are reinvested dividends taxable in the US?
In a taxable account, they generally remain reportable even though the cash buys shares.
Does a DRIP guarantee compounding?
No. It can increase share count, but dividends and investment value can fall.
Can I stop dividend reinvestment?
Usually yes, subject to the plan or broker's processing rules and deadlines.
The bottom line
A DRIP automates the purchase of additional shares with an eligible dividend. It can compound share ownership, but investors still need to evaluate valuation, concentration, fees, taxes and cost basis rather than assuming automation makes the investment safer.
Sources
- Investor.gov, Stocks FAQs
- Investor.gov, Fund Distributions Investor Bulletin
- IRS, Publication 550: Dividends Used To Buy More Stock
- IRS, Publication 550: Dividend Reinvestment Plans and Basis
How we produced the figuresThe example divides a $50 eligible dividend by a $50 purchase price to produce 1 new share, then adds that share to an initial 100 share holding. Fees, withholding and price changes are excluded.
Model dividend reinvestment
Test how starting shares, distributions and reinvestment assumptions affect an educational scenario over time.
About this page. Written by Associate Professor Charles Lo, CPA, PhD and edited by Felix La Spina. Checked against reliable sources before publication. No ads and no paywall. Editorial standards · How we fact check · Corrections log · Report an error
Educational information only. Nothing on this page is personal financial, tax or legal advice. Investing involves risk, including the possible loss of principal.
