Introduction to Dividend Reinvestment
Dividend reinvestment is a systematic method of accumulating shares of a stock that pays a dividend. Many investors use dividend reinvestment as part of a long-term buy-and-hold investment program.
After you purchase a stock, simply enroll in the company's dividend reinvestment plan (DRIP) and your dividends will be automatically used to purchase additional shares. Over many years, these additional shares add up.
You may send voluntary contributions to purchase additional shares. For a mutual fund be sure to check off the dividend reinvestment option on your application form.
Because you pay taxes on dividends, consider putting dividend reinvestment stocks in a retirement account so you can shelter the dividends from your current tax liability.
See Why Dividends Matter.