Dividend Reinvestment Plans (DRIPs) are programs offered by some companies and mutual fund and Exchange-Traded Fund operations that let investors automatically buy more shares or units using cash dividends or distributions.
What that means:
Many publicly traded companies give their shareholders a dividend, which is a small payment that comes out of the operation’s profits. Usually those dollars, which are distributed either quarterly or annually, go into that person’s brokerage or bank account. With a DRIP that money goes toward buying more stock instead. Depending on how much cash is paid out and the price of the shares, it can be used to purchase a full share in the company or, in many cases, a fractional share, which is part (such as half or 25%) of one share. DRIPs can be set up with the company or through a discount brokerage, at little or no cost. In this way, DRIPs allow investors to take better advantage of compounding, which is what helps wealth grow exponentially over time. For example: Let’s say a stock trades for $100 and pays a dividend of $1 every quarter. If you own 100 shares of that stock, you’ll receive enough money from those dividends to buy one more share. Now, if the stock price rises, you’re earning money on 101 shares (and as time goes on, 102 and 103) instead of 100.
DRIPs are one way for investors to take advantage of compound growth.