How do dividend reinvestment plans work?

By reinvesting dividends earned from their investments, over time, investors can potentially experience portfolio growth through this compounding effect. One strategy an investor can use to compound their returns is through a dividend reinvestment plan, or DRIP. A DRIP automatically reinvests dividends to purchase additional shares of a security.

How do reinvestment plans work?

Reinvestment plans can be managed by: Many companies establish and manage their own DRIPs. While most companies require that investors own at least one share of the company’s stock before being eligible to enroll in the reinvestment plan, some companies allow investors to buy into the DRIP without the prior share ownership requirement.

Should you reinvest cash dividends?

Reinvesting dividends and using a dividend reinvestment plan (DRIP) is an automatic feature investors can use to take their dividend payouts and use them to purchase more shares of the company’s stock. However, it’s important to consider all the scenarios before you decide to surrender your cash dividends to an automatic reinvestment plan.