DRIP (Dividend Reinvestment Plan)

How It Works

When an ETF or stock pays a dividend, your brokerage uses that payment to buy more shares, often fractional shares. Those new shares then earn their own dividends, which buy more shares, and so on. This is compound interest in action.

Why It Matters

The compounding effect of DRIP is substantial over long periods. A famous example: $432 invested in Lockheed Martin in 2012 with DRIP grew to $15,000 by 2024. That post got 2,654 upvotes on r/dividends because the visual impact of compounding is so striking.

The effect is most powerful in the accumulation phase (before retirement) when you don't need the income for living expenses. Every reinvested dollar increases your share count, which increases your next dividend, which buys even more shares.

DRIP vs Cash

During accumulation: DRIP almost always wins. You're not spending the dividends anyway, and reinvestment eliminates the friction of manually buying more shares.

In retirement or near-retirement: Taking cash makes more sense because you need the income. Many investors switch from DRIP to cash dividends when they transition from building wealth to living off their portfolio.

Tax Note

Even with DRIP enabled, you still owe taxes on the dividends in taxable accounts. The IRS treats reinvested dividends the same as cash dividends for tax purposes. This is why many investors prefer to DRIP in tax-advantaged accounts (Roth IRA, 401k) and take cash in taxable accounts.