Can You Reinvest Your Dividend

Understanding Dividend Reinvestment Plans (DRIPs)

Dividends represent a share of profits that a company returns to its shareholders. For many investors, these payouts are a primary reason for investing in stocks. However, what if instead of pocketing this profit, you could use it to acquire more shares of the stock, potentially increasing your earnings in the long run? Enter the world of Dividend Reinvestment Plans or DRIPs.

Understanding Dividends

Before diving into DRIPs, it’s crucial to understand dividends. A dividend is a payment made by a corporation to its shareholders, usually in the form of cash or additional shares. Dividends can be seen as a reward for holding onto a company's stock, and they often reflect a company's financial health and future prospects.

What is a Dividend Reinvestment Plan (DRIP)?

A DRIP allows shareholders to automatically reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. Instead of receiving a quarterly dividend check or a direct deposit into their bank account, the shareholder's dividend value is used to purchase more shares of the stock.

Benefits of DRIPs

  1. Compounding Effect: One of the primary benefits of reinvesting dividends is the power of compounding. As you reinvest dividends to buy more shares, those shares too can earn dividends in the future. Over time, this can lead to exponential growth in your investment.
  2. Cost-effective: Many DRIPs allow for the purchase of shares at a discount to the current market price and often with no commission fees.
  3. Flexibility: Some plans allow investors to buy additional shares with extra cash, providing an easy way to invest consistently over time.
  4. Dollar-Cost Averaging: By consistently buying shares, regardless of market conditions, investors can average out the cost of their investments, potentially reducing the impact of market volatility.

Potential Downsides

  1. Tax Implications: Even if dividends are reinvested, they are still taxable in the year they are received, unless the investment is in a tax-deferred account.
  2. Lack of Control: With automatic reinvestment, investors may end up buying shares at a price they consider too high.
  3. Record Keeping: Over time, as more shares are purchased, it can become complex to track the cost basis for tax purposes when the shares are eventually sold.

How to Set Up a DRIP

Most major brokerages offer DRIPs, making the setup process straightforward:

  1. Purchase Shares: Before you can reinvest dividends, you must own shares in the company. Ensure the company offers a DRIP option.
  2. Enroll in the Plan: Once you own shares, contact your brokerage or the company’s transfer agent to enroll in the DRIP. Some companies allow online enrollment.
  3. Decide on Additional Investments: Some DRIPs allow for additional cash contributions. Decide if you wish to make regular contributions.

Alternative to Traditional DRIPs: Synthetic DRIPs

Offered by some brokerages, a synthetic DRIP allows you to reinvest dividends from any stock, not just those that offer traditional DRIPs. This offers flexibility but might come without some benefits of regular DRIPs, like discounted share prices.


Dividend Reinvestment Plans can be a powerful tool for long-term investors, offering a hands-off approach to compounding investments. By understanding the benefits and potential pitfalls, investors can decide if DRIPs align with their financial goals. Always consider consulting a financial advisor to discuss your specific circumstances and ensure that you're making informed decisions for your financial future.