Dividend Reinvestment Plan (DRIP): What Does It Mean?

A Dividend Reinvestment Plan (DRIP) is a program that automatically uses dividend payments to purchase additional shares of the same stock or fund, rather than distributing the cash to the investor. DRIPs allow investors to compound their holdings over time without any additional out-of-pocket investment. Many companies and brokerages offer DRIPs, sometimes allowing fractional share purchases. Over long periods, reinvesting dividends can account for a significant portion of total investment returns — historically, reinvested dividends have contributed roughly 40% of the stock market's total return.