What is a DRIP?
A Dividend Reinvestment Plan (DRIP) automatically reinvests your cash dividends into additional shares of the same stock. Many brokers offer this feature for free, allowing you to buy fractional shares.
Why is DRIP so powerful?
DRIP creates a compounding snowball effect. Each reinvested dividend buys more shares, which generate more dividends, which buy more shares. Over decades, this can significantly multiply your returns.
Are reinvested dividends taxed?
Yes, in taxable accounts dividends are taxed in the year received, even if reinvested. Consider tax-advantaged accounts like IRAs for DRIP investing to defer or avoid taxes.