What is a dividend reinvestment plan?

Otherwise known as Drip, this is an investment plan offered by some companies enabling shareholders to automatically reinvest cash dividends. That means you can accumulate more stock without paying broker commission fees.

Where have you heard about dividend reinvestment plans?

Many people choose to reinvest dividends because it’s an excellent way to increase the value of an investment, particularly over time. You can do this through your broker, although the dividends may still need to be reported to the taxman as taxable income.

What you need to know about dividend reinvestment plans.

If you don’t need a steady stream of cash from dividends, it’s a good idea to reinvest them. In the long term, the biggest advantage is the compounding of returns. With every dividend, you’re increasing the number of shares you hold which, in turn, increases the total return potential of the investment.

The slight downside is that you have no control over when your money from the dividends is used to buy new stock, which means you might be buying new shares at a less than optimal time.

Find out more about dividend reinvestment plans.

Read our definition of dividend policy for further insight into dividend-paying stocks.