What is a Dividend Reinvestment Plan (DRIP)?

Robinhood Learn
Democratize Finance For All.
Definition:

A Dividend Reinvestment Plan, commonly abbreviated as DRIP, is an automatic investment plan that allows investors to use their dividends from a company to buy additional shares or fractional shares from that company.

Main article image
Main article image

🤔 Understanding a Dividend Reinvestment Plan (DRIP)

A Dividend Reinvestment Plan (DRIP) is a program that allows investors to use the cash dividends they receive from a company to buy additional shares or fractional shares in that company automatically. Through these plans, which are often offered by brokerage firms, you can choose to use the cash dividend you receive to buy additional shares in that company. This type of plan is sometimes also offered directly by a company to its shareholders. Of course, dividends are never guaranteed.

Example

Let’s say the fictional Magical Creatures Cake Company (MCCC) has gone viral on Instagram with its new unicorn cupcakes and is now making enough profit to reward its investors with dividends. You own 100 shares in MCCC, currently valued at $10 each; so your stocks have a value of $1,000 altogether. Since MCCC determines to issue a dividend of 2%, you will receive a gross cash dividend of $20, or 2% of the value of your stocks. But if you have a DRIP set up, the dividend will be reinvested back into shares of the company.

Takeaway

A dividend reinvestment plan is like selling the apples from your orchard to buy more trees…

Just like a tree yields fruit, many stocks pay dividends. You can reap those dividends to consume now — eat the apples — or you can keep reinvesting for the future.

Ready to start investing?
Sign up for Robinhood and get stock on us.Certain limitations apply

New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

Tell me more…

What are the pros and cons of DRIPs?

Dividend reinvestment plans (DRIPs) can offer many benefits to an investor, including the convenience of having your money invested for you automatically, and also the advantage of compounding your investment over a long period of time.

If you set up a DRIP with a company and your dividends are reinvested automatically, you’ll be able to take advantage of the company’s continuing success. The compounding effect of reinvesting dividends can be quite nice if the stock rises, but of course you should keep the flipside in mind: If the company’s stock value plummets, you will find yourself with compound losses.

Remember that DRIPs can be a reliable way to invest over time, but may require some belief in the particular company. That means DRIPs may not be the best idea if you shift your money from one stock to another fairly frequently, or if you plan on cashing out all of your stocks soon.

Finally, if you need your dividends in cash to pay your bills, you might not want to set up a DRIP. Always consider your investment objectives. All investments carry risk.

Do you have to pay taxes on DRIPs?

Depending on your particular situation and account type, you may have to pay taxes on any dividends you earn. If you have a DRIP set up, you may have to pay taxes on those dividends before they are reinvested in new shares.

How does a DRIP impact your investments?

Simply put, having a DRIP automates reinvestment in the companies you believe in without you having to manually make a trade. If you’re paid a dividend and want to reinvest it in stocks manually, you’ll have to calculate how much you can buy and place an order yourself and how much will be left over. If you simply automate this process, allowing your brokerage firm or DRIP provider to take your dividend and invest it in more shares, you’ll see the number of shares grow without having too much legwork.

DRIPs of course don’t guarantee a return. In fact, they could increase your losses if a stock’s price declines over the period during which you hold it. All investments carry risk.

How do DRIPs use dollar-cost averaging?

It can be tempting to cancel your DRIP if you see a company’s stock take a sudden nosedive. But remember that one of the side effects of a DRIP is dollar-cost averaging — that is, by buying the stock at various prices as your dividends are reinvested, you may benefit (at least a little) by buying some of your shares at the new, lower price.

Always consider your investment objectives. No one strategy is right for every investor. All investments carry risk.

How do you start a DRIP?

When it comes to setting up a DRIP, many investors find it helpful to start with what they already own and believe are good investments. That is, if you’re already investing in several different companies, you can ask your brokerage firm if they offer DRIPs.

You also can set up a DRIP plan with the touch of a button on many online brokerage accounts. You can often pick which dividend-yielding stocks you want to reinvest dividends into, and which ones you want to collect dividend cash payments from instead.

Ready to start investing?
Sign up for Robinhood and get stock on us.Certain limitations apply

New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

20200204-1080365-3251332

Related Articles

You May Also Like

PARTICIPATION IS POWER™

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

2784249

Robinhood, 85 Willow Road, Menlo Park, CA 94025.© 2024 Robinhood. All rights reserved.
Follow us on

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

2784249

Robinhood, 85 Willow Road, Menlo Park, CA 94025.© 2024 Robinhood. All rights reserved.