Dividend Reinvestment Plans: What They Are and How They Work

There are two main types of dividend reinvestment plans: brokerage account plans and company DRIPs.

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What is dividend reinvestment plan?

What is dividend reinvestment plan? A dividend reinvestment plan is a system of using dividends to purchase more shares of the company that paid the dividends. It is an alternative to receiving the dividends in cash.

Is dividend reinvestment a good idea?

Is dividend reinvestment a good idea? Dividend reinvestment, like any investment, has pros and cons. But reinvesting dividends can be a powerful way to boost your returns over the long term. Brokerage firms

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on Charles Schwab's website

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on E*TRADE's website

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on Vanguard's website

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on Fidelity's website

How do I set up a dividend reinvestment plan, or DRIP?

How do I set up a dividend reinvestment plan, or DRIP? There are two main ways to set up a dividend reinvestment plan: Through the company that pays the dividends. You can invest directly in the dividend reinvestment plan, or DRIP, offered by the company you want to invest in, assuming it has one. You don’t have to have a brokerage account to do this. Through the company that pays the dividends. Through a brokerage account. Many stock brokers will let you choose to reinvest your dividends rather than receive them as payouts. Through a brokerage account. stock brokers » How to find a financial advisor who can help you invest strategically » How to find a financial advisor who can help you invest strategically

Pros and cons of company DRIPs

Pros

Ease of purchase.

Potential savings.

Lower fees.

Potential tax advantage.

Cons

Potential delays.

Holding requirements.

Fees.

Complexity.

Concentration risk.

Pros of company DRIPs

Ease of purchase. You can purchase stock by reinvesting your dividends, and often, companies will let you buy additional stock on a fractional basis. That means you can buy small pieces of the stock with your dividend reinvestment, rather than waiting until you have enough to purchase a full share. Ease of purchase. Potential savings. Companies sometimes offer their stock at a discount to the market price (in some cases, the discount is available only on the shares purchased through dividend reinvestment, not the optional cash purchases). Potential savings. Lower fees. Some company DRIPs don’t charge commissions or fees to enroll or to buy shares. Lower fees. Potential tax advantage. Some company DRIPs let you invest through your IRA. (See if automatically reinvesting your IRA dividends makes sense for you.) Potential tax advantage. automatically reinvesting your IRA dividends » How taxes on stocks work » How taxes on stocks work

Cons of company DRIPs

Potential delays. The companies may follow their own schedules for investing your money — it may be days between the time the company receives your “buy” request and the time it invests your money, and the same goes for selling shares. This could mean the price of the stock has fluctuated. Potential delays. Holding requirements. Some companies require that you’re already a shareholder to enroll in a DRIP. One solution is to buy a single share from a broker and then ask the broker to register that share in your name (the broker likely will charge a fee for this service). Holding requirements. Fees. There may be enrollment and other fees, which often cost more than reinvesting dividends through a brokerage account. There’s usually a fee to sell shares as well. DRIP fees and terms vary, so it would be wise to do your research to find the best plans (and, of course, make sure the company is a worthwhile investment). Fees. Complexity. Managing multiple company DRIPs may entail more paperwork than holding a single brokerage account. Complexity. Concentration risk. Company DRIP plans are solely for people who want to invest in individual stocks — and one specific stock, at that. This limits your ability to invest in other options that are available through brokerage accounts, like mutual funds or exchange-traded funds. Concentration risk. » How capital gains tax works and how to save » How capital gains tax works and how to save

Pros and cons of brokerage account DRIPs

Pros

Ease.

Diversification.

Simplicity.

Cons

Potential purchase limits.

Cost.

Pros of brokerage DRIPs

Ease. You can access multiple investment types — individual stocks, mutual funds and ETFs, to name a few — from the convenience of one account. Ease. Diversification. Because of the wider investment selection through brokerage firms, it's easier to diversify your holdings, either by investing in many dividend stocks or by choosing a mutual fund, which invests in many companies on your behalf. Diversification. Simplicity. It may be simpler to reinvest dividends through a brokerage account, which offers consolidated investment statements and a one-stop-shop for investing. (In company DRIPs, you have to track down the details of each company’s plan. Once enrolled, you’ll likely receive a separate statement for each DRIP you’re invested in.) Simplicity.

Cons of brokerage DRIPs

Potential purchase limits. Not all brokers offer fractional shares, but the practice is becoming more common. (Here's a list of brokers that offer fractional shares.) Potential purchase limits. list of brokers that offer fractional shares Cost. Brokers don't offer stock at a discount. If you're investing in a company that discounts its shares through its DRIP plan, you may save money by enrolling directly with the company. Cost.

Do I pay taxes on reinvested dividends?

Do I pay taxes on reinvested dividends? Yes. it’s important to keep your records straight, because generally you owe tax on dividends in the year you received them, even if those dividends were immediately reinvested. » MORE: How dividend taxes work » MORE:

Key takeaways of dividend reinvestment

Reinvesting dividends can be a powerful way to boost returns over the long term. That said, keep an eye on any investment in which you’re reinvesting dividends continuously over time — generally, investing too much in one place can add risk to your portfolio. » MORE: Learn how wealth management works » MORE: Learn how wealth management works Explore more on About the authors Coombes Andrea is a former NerdWallet authority on retirement and investing. Her stories have appeared in The Wall Street Journal, the SanFrancisco Chronicle, MarketWatch and elsewhere. She has been interviewed onTV and radio, including NPR’s “All Things Considered,” and quoted by national publications such as Fortune, Time and CNBC. Fuente Pamela de la Fuente is a managing editor of NerdWallet's personal finance content. She leads budgeting, money-making, consumer credit and and debt coverage. Ask her and her talented team about why credit scores matter, how to save money on your grocery bill, finding the right side hustle, how to protect your identity for free and more. Previously, she led taxes and retirement coverage at NerdWallet. Pamela joined NerdWallet after working at companies including Hallmark Cards, Sprint Corp. and The Kansas City Star. She has been a writer and editor for more than 20 years. Pamela is a thought leader in content diversity, equity, inclusion and belonging, and finds ways to make every piece of content conversational and accessible to all. She is a graduate of the Maynard Institute's Maynard 200 program, and the National Association of Black Journalists Executive Leadership Academy. She is a two-time winner of the Kansas City Association of Black Journalists' President's Award. She was also founding co-chair of NerdWallet's Nerds of Color employee resource group. How Much Does a Financial Advisor Cost? By Arielle O'Shea Do You Need a Financial Advisor? 7 Ways to Tell By Taryn Phaneuf How to Find Cheap or Free Financial Advice By June Sham 3 Steps to Prepare for Your First Financial Advisor Meeting By June Sham