Many investors leave dividends sitting in their brokerage account as cash. A dividend reinvestment plan — often shortened to DRIP — automatically puts that cash back to work by buying more shares instead.
Here’s what a DRIP stock is, how dividend reinvestment actually works, the pros and cons, and how to turn it on in your own account.
What does DRIP mean?
“DRIP” stands for dividend reinvestment plan. Instead of paying a dividend out to you in cash, a DRIP automatically uses that money to buy more shares — or a fractional share — of the same stock, ETF or mutual fund that paid it.
What is a DRIP stock?
A DRIP stock is simply a dividend-paying stock you’ve enrolled in a dividend reinvestment plan, either directly through the company (or its transfer agent) or through your brokerage account. Almost any dividend payer can become a “DRIP stock” once reinvestment is switched on — it isn’t a separate class of security, just a setting on how the dividend is handled.
How dividend reinvestment plans work
There are two common ways to reinvest dividends:
Direct (company-run) DRIP. Some companies, often through a transfer agent like Computershare, let shareholders enroll directly and buy shares straight from the company, sometimes commission-free and occasionally at a small discount to the market price.
Brokerage DRIP. Most investors today reinvest dividends through their brokerage instead. Major US brokerages — including Fidelity, Charles Schwab, Vanguard and E*TRADE — let you turn on automatic dividend reinvestment for individual stocks, ETFs or your whole portfolio, usually at no extra cost and often supporting fractional shares.
Once enrolled, each dividend payment buys additional shares (or a fractional share) at the market price on the payment date, rather than landing in your account as cash.
Pros and cons of DRIP investing
Benefits
Automated. You don’t have to manually place a trade every time a dividend is paid.
Dollar-cost averaging. Shares are bought at whatever the price happens to be on each payment date.
Compounding. Reinvested dividends can meaningfully boost long-term returns.
Fractional shares. Most brokerage DRIPs support fractional shares, so every dollar of dividend gets invested.
Usually free. There’s typically no commission on the reinvestment purchase.
Drawbacks
No income. Not ideal for retirees or anyone relying on dividends to cover expenses, since the cash isn’t available to spend.
No price control. Shares are bought automatically regardless of valuation.
Concentration risk. Reinvesting keeps adding to the same position, which can unbalance a portfolio over time.
Still taxable. Dividends are taxable in the year they’re paid, even though you never see the cash.(1)
Cost-basis tracking. Every reinvestment is a separate small purchase at its own price, which adds recordkeeping.
How to start a DRIP account
Setting up dividend reinvestment takes a few minutes:
Open or use an existing brokerage account. Any standard taxable brokerage account, or an IRA or 401(k) brokerage window, that holds dividend-paying investments will work.
Fund the account and buy dividend-paying stocks, ETFs or mutual funds. Common DRIP candidates include dividend aristocrats and broad dividend index funds.
Turn on automatic dividend reinvestment. Most brokerages let you enable this account-wide or per holding, from your account settings or the position’s detail page.
Confirm which holdings are enrolled. Some brokerages default new dividend stocks to cash unless you opt in per position.
Monitor your position and cost basis. Your brokerage’s tax tools track each reinvestment purchase, but it’s worth periodically checking the numbers against your own records.
Hot tip: Reinvest inside a retirement account
Holding DRIP stocks inside a traditional or Roth IRA avoids the annual tax bill on reinvested dividends altogether, since the tax hit is deferred or eliminated rather than due every year they’re paid.
Is reinvesting dividends right for you?
Reinvesting tends to suit investors who are still building wealth and don’t need the cash right now — compounding can add up meaningfully over a long holding period. It’s generally less suitable for retirees or anyone drawing income from their portfolio, since the whole point of a DRIP is that you don’t receive the cash. It’s also worth reviewing periodically: if reinvesting has pushed one stock to an outsized share of your portfolio, you may want to redirect new dividends elsewhere instead of continuing to concentrate the position.
Are DRIP stocks taxed?
Yes. Reinvested dividends are taxable income in the year they’re paid — the IRS treats a reinvested dividend the same as one you took in cash.(1) Depending on the stock and how long you’ve held it, dividends may be taxed as qualified dividends at long-term capital gains rates, or as ordinary income. Your brokerage reports the total on Form 1099-DIV.
Because each reinvestment is a new purchase at its own price, it also sets a new cost basis for that batch of shares, which matters later when you sell.(2) Most brokerages track this automatically.
Compare brokers that support automatic dividend reinvestment
See which platforms make it easy to turn DRIP on for your whole portfolio.
A DRIP stock is just a dividend-paying stock where the dividends are automatically reinvested rather than paid out in cash. For long-term investors who don’t need the income today, it’s a simple, usually free way to keep compounding returns — but it’s worth checking in periodically so reinvestment doesn’t leave your portfolio too concentrated in one position, and remembering that the dividends are taxable whether or not you ever see the cash.
Frequently asked questions
DRIP stands for dividend reinvestment plan — an arrangement that automatically uses your dividend payments to buy more shares instead of paying them out as cash.
It can meaningfully grow a portfolio over the long run through compounding, but it isn't a shortcut — the effect builds gradually over years, not months.
Yes. Reinvested dividends are taxed the same as cash dividends in the year they're paid, unless the shares are held in a tax-advantaged account like an IRA.
Turn on automatic dividend reinvestment in your brokerage account settings, either for your whole account or for individual holdings.
Sources
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
See full bio
Matt's expertise
Matt
has written
258
Finder guides across topics including:
We analyzed stocks of over two dozen crypto companies to determine which are investment worthy.
Advertiser disclosure
Finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which Finder receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. Finder compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
