Dividend reinvestment plan (DRIP)

A dividend reinvestment plan (DRIP) is an arrangement in which a shareholder's cash dividends are automatically used to purchase additional shares of the same company instead of being paid out as cash. DRIPs typically buy fractional shares, so every dollar is reinvested.

How it works

There are two main types:

• Brokerage DRIPs: most brokers let clients switch on reinvestment for eligible holdings. The broker buys shares in the open market on or shortly after the payment date, usually without commission.
• Company-sponsored DRIPs: run by the company through its transfer agent. Some issue new shares directly from the company, sometimes at a small discount to market, and may allow optional cash purchases.

Reinvested dividends are still taxable in the year they are paid, just as if the investor had received cash. Each reinvestment creates a new tax lot with its own cost basis, which matters when shares are later sold.

Why it matters for traders

For long-term holders, reinvestment compounds returns: more shares produce more dividends, which buy more shares. The trade-off is less control over timing and price, since reinvestment happens regardless of valuation. For companies, a DRIP that issues new shares raises equity capital and creates modest dilution; some REITs and utilities use discounted DRIPs as a steady funding source. Traders who actively manage positions often turn DRIP off to avoid small odd lots and complicated cost basis records.

Example

An investor owns 500 shares of Harbor Freightline (ticker HRBF), which pays a $0.33 quarterly dividend. On the payment date the dividend totals $165. With HRBF at $30, the DRIP buys 5.5 shares, raising the position to 505.5 shares. Next quarter's dividend is paid on 505.5 shares, or about $166.82.

FAQ

Are reinvested dividends taxed?

Yes. In the US, dividends reinvested through a DRIP are taxable in the year paid, the same as cash dividends.

Can I turn off dividend reinvestment?

Yes. Brokers and transfer agents let you switch between reinvesting and receiving cash.