GLOSSARY // General Investing
DRIP (Dividend Reinvestment Plan)
A DRIP is a dividend reinvestment plan: instead of receiving cash dividends, the payout automatically buys more shares (including fractional shares) of the same stock or fund, usually commission-free. Each dividend then earns its own dividends, which is compounding running on autopilot.
Two mechanics to know. Reinvested dividends are still taxable income in the year paid, even though you never saw the cash, and every reinvestment creates a new tax lot, so a decade of quarterly DRIPs leaves you with 40 small lots to track at sale time. Brokers report the basis now, but the tax bill on "income you never touched" surprises people every April.
You own 1,000 shares of a stock at $40 paying a $0.50 quarterly dividend. Q1 pays $500, which the DRIP converts to 12.5 new shares. Q2's dividend is now paid on 1,012.5 shares: $506.25, buying more stock again. Run that for 20 years at a steady yield and reinvested dividends, not price appreciation, can account for a third or more of the total return.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.