A Dividend Reinvestment Plan (DRIP) is just an automatic way to turn the cash you earn from a stock back into more of that same stock.
Instead of sending the cash dividend to your bank account, the company or your broker uses that money to buy you more shares (or even fractions of a share). The best parts? You usually don't have to pay a trading fee to do it, and some companies will even sell you those extra shares at a tiny discount.
The Story of Sarah’s Sneaky Shares
To see how this works in the real world, meet Sarah.
Sarah bought 100 shares of a steady, old-school utility company called BlueSky Power. Every three months, BlueSky pays its investors a dividend of $1 per share.
Without a DRIP: Every quarter, $100 in cash drops into Sarah's brokerage account. She usually forgets it's there, or she accidentally spends it on takeout. Her investment stays exactly at 100 shares.
With a DRIP: Sarah checks a box on her account to turn on her DRIP. Three months later, BlueSky pays out its dividend. Instead of giving Sarah $100 in cash, her brokerage firm automatically uses that $100 to buy her more BlueSky stock. Let's say the stock is trading at $50 a share; Sarah suddenly owns 102 shares instead of 100.
Three months after that, BlueSky pays another dividend. But this time, Sarah doesn't just get paid for her original 100 shares—she gets paid for 102 shares . She gets $102, which automatically buys her another two-and-a-bit shares.
Without adding a single penny of her own paycheck, Sarah's slice of the company keeps growing entirely on autopilot.
A Dividend Reinvestment Plan (DRIP) is a program offered by corporations or brokerage firms that allows investors to automatically reinvest their cash dividends into additional shares or fractional shares of the underlying stock, often with zero commission fees and sometimes at a slight discount to the current market price.
See also: Related concept on Wolfram