The Dividend Reinvestment Hack That Works While You Sleep
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Imagine growing your wealth automatically, even while you sleep. That’s the promise of dividend reinvestment plans, or DRIPs. These programs take the dividends you earn from stocks or funds and immediately put them back to work by buying more shares (sometimes fractional shares). With no extra effort, your money compounds over time, building wealth in the background.
Here’s how DRIPs work, why they can be powerful for long-term investors and a few cautionary notes to keep in mind.
What Is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan automatically turns your cash dividends into additional shares of the same stock or fund. Instead of getting paid out in cash, you accumulate more ownership, which means more future dividends. For many investors, this “set it and forget it” approach takes the guesswork out of growing wealth.
How Compounding Supercharges Growth
What makes DRIPs so worthwhile is the benefit of the compounding effect, according to Julia Handoshko, CEO of broker Mind Money.
“When automatically reinvested, even small dividends create returns on returns … geometrical growth over time.”
She explained that if a dollar earned 5% per year, in the first year that would net you $1.05. In the second year, that 5% earning is now on top of the $1.05, not just the original $1. “This is a snowball effect, and over decades, it drives wealth creation.”
Every payout you receive buys more shares, and those shares generate dividends of their own, added David Beahm, president and CEO of Blanchard and Company. “You can add about 13% to your total return over 20 years just by reinvesting a 3% yield. It can be a wonderful choice for main street investors,” he explained.
Fractional Shares Give Small Investors an Edge
DRIPs don’t just buy whole shares. They often let you reinvest into fractional shares, which means even a small dividend can keep compounding right away.
Beahm explained, “They just automate dividend reinvestment, often with zero‐commission fractional shares.” By contrast, a broker’s manual reinvestment may charge fees and only buy whole shares.
“For a small investor, the edge with a DRIP comes in how zero-fee fractional shares let $25 dividends buy stock immediately. With no ticket charge, you keep compounding 100% of your money,” he said.
Watch Out for US Dividend Taxes
While you may not pay fees, reinvested dividends may still be taxed.
“In most jurisdictions, reinvested dividends are still taxed as income in the year they’re paid. And it’s even regardless of the form people took them in (cash, equities, etc.),” Handoshko said.
She added that the U.S. system, with its layers of dividends and capital gains taxation, is especially complex. That means it’s wise to check with a tax professional before relying too heavily on reinvested dividends to grow your portfolio.
DRIPs Are About Compounding, Not Saving Fees
Another common misconception is that DRIPs save on fees. Historically, they did, with many plans offering low or no fees compared to manual reinvestment. But today, with most brokers offering zero-fee reinvestment anyway, that advantage has mostly disappeared.
“DRIPs aren’t about saving fees. They’re about harnessing compounding,” Handoshko said. “But whether that compounding works fully in an investor’s favor or not depends as much on tax rules. Certainly not on market returns.”
A Great Way To Build Wealth
For investors who want a hands-off way to build wealth, dividend reinvestment plans can be a powerful tool. By automatically buying more shares, or fractions of shares, DRIPs create the snowball effect of compounding that grows stronger the longer you hold.
They’re not without drawbacks, especially when it comes to taxes. But for patient investors looking for a “works while you sleep” strategy, DRIPs can quietly turn small dividends into a meaningful boost to long-term returns.
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