DRIP (Dividend Reinvestment Plan)
A DRIP, or dividend reinvestment plan, automatically converts each cash dividend into additional shares of the same stock, usually including fractional shares and without commission. Instead of cash accumulating in the account, the position grows itself, and every reinvested share starts generating dividends of its own.
The math
An investor holds 300 shares of a hypothetical stock at $60 paying $0.50 quarterly. The first payment of $150 buys 2.5 more shares.
Next quarter, 302.5 shares produce $151.25, which buys a bit more again.
| Shares held | Dividend paid | |
|---|---|---|
| Quarter 1 | 300 | $150.00 |
| Quarter 2 | 302.5 | $151.25 |
| After one year | about 310 | all reinvested |
The position has grown by about 10 shares with no new money invested.
Run the same mechanics for 20 years with modest dividend growth and the reinvested shares end up contributing a substantial fraction of the final position, all built from payments many investors would have left idle or spent.
The trap
Automation buys without judgment. A DRIP purchases shares on the payment date at whatever the market asks, so a stock that has run far past fair value keeps getting bought, quarter after quarter, precisely when adding is least attractive.
Concentration creeps up the same way: a winner that pays and reinvests for years can swell into an oversized bet nobody consciously chose. And in taxable accounts, reinvested dividends are still taxed the year received, then create a trail of small tax lots that punish sloppy record keeping at sale time.
The move
Practicing stock pickers run DRIPs selectively rather than account-wide. Enable it on holdings still trading at reasonable valuations and switch to cash collection on anything stretched, redirecting those dividends toward the current best idea.
Review the setting once or twice a year alongside position weights, and keep every reinvestment confirmation for cost basis. The plan is a compounding tool, not a substitute for the allocation decision it silently makes each quarter.
Reference: SEC investor.gov, DRIPs