DRIP is the investing acronym for a dividend reinvestment plan that uses dividends to buy more shares.
In a dividend reinvestment plan, cash distributions from a company or fund are automatically used to purchase additional shares or fractional shares. The investor therefore receives fewer or no cash dividends while increasing ownership. Over time, reinvested distributions can contribute to compounding because later dividends may be calculated on a larger share balance.
Some plans are operated directly by companies, while others are provided by brokers. Fees, fractional-share treatment, enrollment rules, and tax reporting depend on the plan and the investor’s jurisdiction. In a taxable account, reinvested dividends can still be treated as taxable income even though the investor did not receive the money in cash.
A DRIP does not eliminate investment risk. Reinvesting keeps the money in the same security, so it can increase concentration. Investors may instead choose to take dividends as cash and rebalance across several assets.