Investing Assets & Markets Stocks Your Guide to DRIP Investing Using Dividends To Buy More Shares of Stock By Brandon Renfro Brandon Renfro Twitter Website Brandon Renfro is a Certified Financial Planner, Retirement Income Certified Professional, an IRS credentialed Enrolled Agent, and an assistant professor of finance. He also runs his own retirement and wealth management firm. Brandon spends his weeks talking about personal finance matters with everyone from college students to retirees. learn about our editorial policies Updated on October 31, 2021 Reviewed by Akhilesh Ganti Reviewed by Akhilesh Ganti Website Akhilesh Ganti is a forex trading expert and registered commodity trading advisor who has more than 20 years of experience. He is directly responsible for all trading, risk, and money management decisions made at ArctosFX LLC. He has Master of Business Administration in finance from Mississippi State University. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article What Are DRIPs? How Does DRIP Investing Work? Pros and Cons of DRIP Investing How to Set Up a DRIP Photo: Yiu Yu Hoi / Getty Images Dividend reinvestment plans, or DRIPs, are an arrangement in which cash dividends you receive from the investments you hold are automatically reinvested into additional shares. Enrolling in a DRIP makes the process of reinvesting cash dividends simpler, and even cheaper, in some cases. Before you enroll in a DRIP, it’s important to learn how DRIPs work, the benefits they provide and the drawbacks, and how you can enroll in a DRIP. What Are DRIPs? DRIPs are programs that automatically invest into more shares any cash dividends you receive. You must elect to enroll in a DRIP; these plans are not compulsory. Depending on your broker, you could have multiple investment options that offer DRIP. For example, TD Ameritrade has DRIPs for stocks, ETFs, mutual funds, and American depository receipts. How Does DRIP Investing Work? For a basic example of how DRIPs work, assume you have 500 shares of a company that pays out a $1 per share dividend. You’re enrolled in a DRIP program through your brokerage firm. When the company pays out its dividends, you’ll receive $500. Suppose that when you receive the dividend the stock is trading for $25 per share. Instead of receiving the $500 cash, you’d receive an additional 20 shares of the stock instead. Fractional Shares Fractional shares are just what they sound like: They are fractions of a whole share. So, it’s possible to own 1.65 shares of a stock, for example, instead of one or two shares. What if the stock was $26 in our example above? Five hundred dollars would purchase an uneven 19.23 shares. You would receive 19 shares worth $494, but different brokerage firms may treat the .23 fractional share differently. In some cases, you could buy the fractional share and would receive 19.23 shares. Note Not all brokerages offer fractional shares. The money left over from buying full shares can be credited as cash to the investor’s account. Pros and Cons of DRIP Investing Pros Dollar-cost averaging Immediate reinvestment Lower commissions Cons Taxation Lack of diversification Pros Explained: Dollar-cost averaging: By automatically reinvesting dividends you will inherently practice dollar-cost averaging. Dollar-cost averaging involves the recurring purchase of an investment, rather than investing in one lump sum. Purchasing additional shares at regular intervals can help lower your total average purchase price. Immediate reinvestment: Because the dividends are automatically reinvested into additional shares, DRIPs can reduce the chance that you leave the cash sitting uninvested if you forget to manually do it. Cash left uninvested in an account can reduce returns over time. Lower commissions: If you have a DRIP set up through a brokerage firm, the firm may eliminate the commission on most reinvested dividends. This will mean more of your cash is invested into additional shares. However, not all brokerage firms provide DRIPs without commission, so make sure to check yours. Cons Explained Taxation: If you participate in a DRIP in a taxable account, be aware that you will still have to pay up to 20% in taxes on your reinvested dividends. The particular concern here is to make sure that you have the cash to actually pay the tax when it’s due. Otherwise, you may be forced to sell some of your shares to get the cash anyway. Lack of diversification: If you set up a DRIP plan for one stock, you will potentially accumulate a significant amount of that particular stock over time, reduce your diversification, and leave you with more risk than is necessary. Make sure to periodically check your portfolio and rebalance. How to Set Up a DRIP Normally, you can enroll in a DRIP through your brokerage firm when you purchase an investment by logging into your online account and selecting the option to have dividends reinvested. Or, you can call your advisor if you work with one and have them walk you through it. Note Some companies offer their own DRIPs, too. To sign up for a DRIP with an issuing company, you will need to contact them directly to enroll. You can find the relevant contact information through the company’s investor relations. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Interactive Brokers. "Overview of IBKR's Dividend Reinvestment Program (DRIP)." MerrillEdge. "Do You Pay Taxes on Reinvested Dividends?"