What Is the Dividend Reinvestment Plan (DRIP)?

What Is the Dividend Reinvestment Plan (DRIP)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Dividend Reinvestment Plan, also known as a DRIP, is a financial program offered by companies that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. After an investor enrolls in a DRIP, instead of receiving quarterly dividend payments via check or direct deposit, they will have their dividends automatically used to purchase more of the company’s stock. This allows investors to steadily increase their stock holdings, and potentially their earnings, over time.

Related Questions

1. How do you join a Dividend Reinvestment Plan?

To join a DRIP, you must first be a shareholder of the company’s stock. You can become a shareholder by purchasing the company’s stock through a brokerage firm. Once you hold the stock, you can enroll in the DRIP directly through the company, or sometimes through your broker if they offer such a service.

2. Can you withdraw from a Dividend Reinvestment Plan?

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Yes, participation in a DRIP is voluntary and you can opt out anytime. If you decide to withdraw, future dividends will be paid in cash instead of being reinvested into more shares. However, the terms for selling the shares acquired through the plan will depend on the company’s specific DRIP terms or your brokerage’s selling procedures.

3. Are Dividend Reinvestment Plans worth it?

DRIPs can be very beneficial for long-term investors who want to take advantage of the power of compounding, because they use dividends to buy more shares which in turn generate more dividends. If the stock price increases, the value of the reinvested dividends can grow significantly over time. But like any other investment, DRIPs carry risks and are not suitable for everyone.

4. Do all companies offer Dividend Reinvestment Plans?

No, not all companies offer DRIPs. Many large, established companies with a history of paying dividends offer them, but smaller or newer companies may not. It’s best to check the investor relations section of a company’s website or contact the company directly to find out.

5. Are there any fees associated with Dividend Reinvestment Plans?

The fees associated with DRIPs vary by plan. Some companies offer these plans with no fees at all, while others may charge for enrollment, purchasing shares, reinvesting dividends or selling shares. Always check the plan’s prospectus or speak with a financial advisor for a complete understanding of the costs.