A DRIP, or Dividend Reinvestment Plan, is a program that allows investors to automatically reinvest cash dividends into additional shares of the same company or fund instead of receiving the dividends in cash.
How It Works
When a company pays dividends, enrolled shareholders automatically receive more shares (or fractional shares) instead of cash. This allows investors to compound their returns over time without paying trading fees on reinvested dividends.
Benefits
- Compounding: Reinvested dividends generate more dividends over time.
- Low cost: Most DRIPs reinvest dividends without charging commissions.
- Discipline: Encourages long-term investing and gradual wealth building.
Final Thoughts
DRIPs are a simple and effective way to grow investments through compounding. They work best for long-term investors focused on steady growth rather than immediate cash income.