A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to purchase additional shares of the same stock or fund, rather than paying out cash. This harnesses the power of compounding—your dividends buy more shares, which then generate their own dividends.

DRIP accelerates growth through compounding returns. Each dividend payment buys additional fractional or whole shares, increasing your total share count. When the next dividend is paid, it is calculated on a larger number of shares, generating even more dividends to reinvest.

While DRIP is generally beneficial, there are some considerations. You don not control the timing of purchases since dividends are automatically reinvested, which could be a disadvantage in overvalued markets. Tracking cost basis becomes more complex with numerous small purchases.