Dividend Reinvestment Plans (DRIPs): How to Compound Your Income
Automatically reinvesting dividends buys more shares, which pay more dividends. Here's how DRIPs work and when to turn them off.
A dividend reinvestment plan (DRIP) automatically uses your cash dividends to buy more shares of the same stock or fund — often including fractional shares and with no commission.
Why DRIPs Are Powerful
Each reinvested dividend buys more shares, which then pay their own dividends. Over decades, this snowball can account for a large share of total returns. It's dollar-cost averaging on autopilot.
How to Set One Up
Most brokers let you turn on dividend reinvestment for your entire account or for individual holdings with a single setting. Some companies also offer direct DRIPs through their transfer agents.
Things to Know
- Taxes still apply in taxable accounts. See how dividends are taxed.
- Track your cost basis, since every reinvestment is a new purchase.
- Concentration can creep up if one holding pays large dividends — rebalance periodically.
When to Turn It Off
When you need income — for example in retirement — you can switch to receiving cash. Some investors also turn off DRIPs to redirect dividends toward underweight holdings.
Frequently Asked Questions
Are DRIPs worth it?
Do DRIPs cost anything?
Can I use a DRIP with ETFs?
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