3 Quick Facts to Simplify a Dividend Reinvestment Plan (DRIP)
DRIP, not drip
Drip has been a term you have heard people use referring to how fashionable they are, but have you heard of a DRIP? DRIP stands for a dividend reinvestment plan. It is a plan in which cash dividends that you receive from a company are automatically reinvested to purchase more stock of the company, which increases your ownership and returns over time.
A cash dividend is a payment made by a company out of its earnings to its investors. All companies do not offer cash dividends. Also, cash dividends are not guaranteed. Cash dividends are typically expressed as a yield, known as dividend yield. Dividend yield is a percentage that shows how much a company pays out in cash dividends each year relative to its share price.
My favorite brokerage, Robinhood, recently released this feature in mid-June. It is a feature that has been around through older and established brokers, but now that Robinhood offers it, I found that this is a more than perfect time to highlight what it is. As stated earlier, in a DRIP, dividends are automatically reinvested. DRIPs use a technique known as dollar-cost average to average out the price at which dividends are reinvested. Cash dividends reinvested in DRIPs are still considered taxable income.
