Important: Investors should note that a DRIP reinvestment can result in the purchase of fractional shares. Instead of receiving $20 in cash, the investor receives 1 additional share of stock. Here's the calculation for this DRIP stock example:ġ00 shares x $0.20 dividend = $20 reinvestment to buy 1 share at $20/share The company announces a $0.20 per share quarterly dividend and the stock price is $20 per share at the time of the dividend. Example of a Dividend Reinvestment Planįor a DRIP example, let's say an investor owns 100 shares of a company's stock and has elected to have dividends reinvested. Qualified dividends are taxed at a 20%, 15%, or 0% rate, depending on the investor's federal income tax bracket. Important: Investors should note that dividends reinvested with a DRIP plan are taxable to the investor as income, just as dividends received in the form of cash or check. Since dividends are typically paid on a periodic basis, such as quarterly, a DRIP stock takes advantage of dollar-cost averaging. What Is a DRIP?ĭRIP stands for ' dividend reinvestment plan', which is a program that allows an investor to have stock or fund dividends automatically used to purchase more shares of the dividend-paying instrument, rather than sent to the investor as cash. Investors who choose to reinvest their dividends are typically looking for long-term growth of their investment, such as a stock, mutual fund or exchange-traded fund (ETF). MicroStockHub/iStock via Getty Images What Is Dividend Reinvestment?ĭividend reinvestment occurs when an investor elects to have investment dividends buy more shares of the investment, rather than receive the dividends in cash or check.
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