What is a Dividend Reinvestment Plan (DRIP)?
A Dividend Reinvestment Plan, or DRIP, is an investment strategy where the cash dividends you receive from a company or fund are automatically used to buy more shares of that same company. Over time, this creates a powerful "snowball effect" through the magic of compound interest. Our free DRIP Calculator helps you visualize this compounding over decades.
The Magic of Dividend Growth Investing
When forecasting dividend returns, many investors only look at the current dividend yield. However, high-quality companies (like Dividend Aristocrats or Kings) raise their dividends every single year. This is known as Dividend Growth.
If you buy a stock today with a 3% yield, but they raise their dividend payout by 8% every year, your "Yield on Cost" (the yield based on your original purchase price) will skyrocket over time. A 3% yield today could effectively become a 10% or 15% yield on your original investment in 15 years.
Taxes and DRIPs
One crucial factor to consider when reinvesting dividends is taxes. Unless your investments are held in a tax-advantaged account like a Roth IRA or traditional 401(k), you will owe taxes on the dividends you receive every year-even if you automatically reinvest them.
Pro Tip: For most investors in the US, "qualified dividends" are taxed at the long-term capital gains rate, which is typically 15% (or 0% if your income is low enough, and 20% for high earners). "Ordinary dividends" are taxed at your regular income tax rate.
Why Turn DRIP On?
- Dollar-Cost Averaging: Reinvesting dividends means you automatically buy more shares when the price is low, and fewer when the price is high.
- Zero Commissions: Most modern brokerages don't charge fees to reinvest dividends.
- Fractional Shares: DRIPs allow you to buy fractional shares, meaning every single penny of your dividend goes to work immediately.