Video Lesson
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What Is DRIP?
A Dividend Reinvestment Plan (DRIP) automatically takes the cash dividends you earn from a stock or fund and uses them to purchase additional shares. Instead of cash sitting idle in your account, every dividend payment immediately goes back to work — buying fractional shares of the same holding and beginning to earn dividends of their own.
The Compounding Effect of DRIP
The math behind DRIP is striking. A $10,000 investment in a stock with a 4% dividend yield and 5% annual stock appreciation grows to about $32,000 over 30 years with dividends reinvested — compared to roughly $22,000 if dividends are taken as cash. The reinvested dividends buy shares that generate their own dividends, creating an accelerating compounding cycle.
DRIP vs Taking Cash Dividends
During your accumulation years — building wealth for the future — reinvesting every dividend accelerates compounding and grows your share count automatically. Once you're in retirement and need income, switching off DRIP and receiving cash dividends makes complete sense. The choice is reversible any time.
Dollar-Cost Averaging Through DRIP
Since dividends typically arrive quarterly, DRIP buys more shares four times a year regardless of market conditions. Sometimes you buy at highs, sometimes at lows — it averages out over time. This enforces consistent investment discipline without any conscious effort on your part.
How to Set Up DRIP
Log into your brokerage, navigate to dividend settings, and enable automatic reinvestment. Most major brokers — Fidelity, Schwab, Vanguard — support fractional share reinvestment. Once enabled, it runs silently in the background for years, compounding your wealth without requiring any action from you.