Definition
An arrangement that automatically uses each dividend to buy more shares (including fractions) of the same investment instead of paying out cash. Most brokerage accounts offer it free with a checkbox.
Why it matters
DRIPs put compounding on autopilot: every payout immediately goes back to work. In taxable accounts the dividends are still taxable in the year received, reinvested or not, and each purchase adds a small lot to your cost basis records.
Example
An investor holds 100 shares at $50 with a 3% yield: $150 of dividends a year. Reinvested, that buys about three more shares annually, and those shares earn their own dividends, the quiet loop that builds wealth over decades.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.