What is a Dividend Reinvestment Plan (DRP)?
A Dividend Reinvestment plan, often called a DRP, is an option some companies offer that lets you reinvest your dividends back into more shares instead of receiving the cash. For example, if you own 100 shares and the company pays a $100 dividend, you can choose to receive extra shares worth $100 dollars rather than money in our bank account.
The beneffit of a DRP is that it alllows your investment to grow automatically. Over time, reinvesting dividends can compound your returns, as the new shares you receive may also go on to earn dividends in the future. Many DRPs also avoid brokerage fees, making them cost effective for small investors.
The downside is that you miss out on the cash, which some people rely on for income. The extra shares you receive are also still taaxable as if you had received cash, so it is important to keep records for tax purposes. For beginners, DRPs are a simple way to build term wealth without needing to place extra trades. They turn dividends into an automatic reinvestment strategy, which can be powerful when held over many years.