Investing term

What is DRIP?

Dividend Reinvestment Plan — automatically uses cash dividends to buy more shares of the same company.

A DRIP (Dividend Reinvestment Plan) automatically uses the cash dividends you receive to buy more shares of the same investment, often fee-free and in fractional amounts. Instead of the dividend landing as cash you might spend or leave idle, it's immediately put back to work buying more of the holding.

The power is in the compounding loop it creates: each dividend buys shares, those new shares pay their own dividends, which buy still more shares, and so on. Over decades this snowball is significant — reinvested dividends have historically accounted for a large share of the stock market's total return. A DRIP makes the whole process automatic and frictionless, which is exactly why it's such an effective, hands-off way to grow a holding over the long run.

Dividends that buy more dividends
Reinvested dividends compound in a loopDividend paidBuys more sharesMore dividendsAutomatic, fee-free — a large share of long-run returns comes from this

A DRIP reinvests each dividend into more shares, which pay their own dividends — a compounding loop that has driven a large share of long-run stock returns, automatically and fee-free.

For example

Your fund's $200 quarterly dividend automatically buys more shares; those shares pay their own dividends next quarter, quietly compounding your position.

Learn it by doing

That's DRIP in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 8, Corporate Actions: What Lands in Your Account).

Try the free lesson →

Why it matters to you

DRIPs matter because they automate one of the most powerful and underrated engines of long-run returns: reinvested dividends compounding. By removing the friction and the temptation to spend or forget the cash, a DRIP ensures every payout keeps working, turning a modest income stream into a growing pile of shares over time. For a long-term investor, switching on automatic reinvestment is a simple, one-time decision that quietly boosts results for decades.

⚠ Forgetting reinvested dividends are still taxable

In a standard taxable account, a reinvested dividend is generally taxable in the year it's paid, even though you never received the cash. Investors sometimes owe tax on income they never saw. Reinvesting is still worthwhile for the compounding, but expect the tax bill, and remember reinvestments raise your cost basis. Rules vary by country.

Frequently asked questions

What is a DRIP?

A DRIP (Dividend Reinvestment Plan) automatically uses your cash dividends to buy more shares of the same investment, often fee-free and in fractional amounts. Rather than receiving the dividend as cash, it's reinvested, so your holding grows and compounds over time without any action from you.

Should I reinvest dividends with a DRIP?

For long-term growth, usually yes — reinvesting keeps every dividend working and harnesses compounding, which has historically driven a large share of stock returns. The main reasons not to are if you need the income to spend or want to direct the cash elsewhere. In a taxable account, reinvested dividends are still taxable.

Are reinvested dividends taxed?

In a standard taxable account, generally yes — a dividend is typically taxable in the year it's paid, even if a DRIP reinvests it and you never see the cash. The reinvested amount also adds to your cost basis, so you aren't taxed on it again later. Tax rules vary by country.

Read the full guide

Investing basicsWhat Is a Dividend? (And How You Get Paid for Doing Nothing)A dividend is your cut of a company's profit, paid in cash for owning the stock. The three numbers that separate a healthy payout from a trap.6 min readInvesting basicsWhat Is Dollar-Cost Averaging? (And Why Boring Beats Brilliant)Dollar-cost averaging means investing a fixed amount on a fixed schedule, whatever the price. Why it lowers your average cost — and when it doesn't.8 min read

Related terms

AcquisitionOne company buys another. The bought company's shares are converted to cash, acquirer stock, or a mix at the closing price.Carve-outA parent company sells part of a subsidiary in an IPO, keeping a stake.Corporate actionAny event initiated by a company that changes its securities or distributes value to holders.Cost basisWhat you originally paid for a holding, used to calculate gains and losses when you eventually sell.
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