What Is a Dividend Reinvestment Plan (DRIP)?

A dividend reinvestment plan (DRIP) is a program that enables investors to reinvest their cash dividends into additional shares of the underlying stock.

Most DRIPs allow investors to purchase shares commission-free or for a nominal fee, often at a significant discount to the current share price.

Key Takeaways

  • A DRIP uses the proceeds generated from dividends to purchase more shares of the company.
  • Investors can buy shares commission-free or at a nominal fee, often at a discounted rate compared to the current share price.
  • DRIPs are taxed as ordinary dividends, even though they are used to purchase shares.
  • These benefits allow investors to compound their returns over time by accumulating more shares.

There are several advantages to purchasing shares through a DRIP.

Advantages for the Investor:

  • Shareholders can accumulate more shares without paying a commission.
  • Many companies offer shares at a discount ranging from 1% to 10% off the current share price.


Advantages for the Company:

Dividend-paying companies benefit from DRIPs in a couple of ways:

  • They receive more capital.
  • Shareholders who participate are less likely to sell.

Real-World Example of a DRIP

Many major ASX-listed companies offer DRIPs, including BHP (ASX: BHP).

For instance, if you had purchased $10,000 of BHP stock in July 2003 and reinvested dividends at an average rate of 8% per year, your investment would now be worth $49,268.

You can download the offline guide here Dividend Reinvestment Plan Guide

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