DRIP.
In plain English
A DRIP stands for dividend reinvestment plan, a setting that takes each dividend you earn and immediately buys more shares of the same stock or fund. Instead of cash landing in your account on the payment date, you receive additional shares, often including fractional shares. Over time this compounds, because the new shares earn their own dividends, which buy still more shares. Many brokers offer commission-free reinvestment, and some company-run DRIPs let you buy at a small discount.
01Why it matters
A DRIP is a hands-off way to compound, and that compounding is where decades of dividend investing quietly builds wealth. The tradeoff: in a taxable account, reinvested dividends are still taxable income even though you never touched the cash.
02The math, step by step
You own 100 shares paying a $1 per share dividend, so you earn $100. With a DRIP and a share price of $50, that $100 automatically buys 2 more shares, giving you 102 shares. Next time, your dividend is calculated on 102 shares, not 100, and the snowball keeps growing. Over 30 years, reinvesting rather than spending dividends can meaningfully change your ending balance.
03What this is NOT
A DRIP is not a tax dodge. Even though you receive shares instead of cash, the IRS still treats reinvested dividends as taxable income in a regular brokerage account in the year they are paid.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice