Automatically using dividend payments to purchase additional shares.
Dividend reinvestment is the practice of using dividend payments to automatically purchase additional shares of the company paying the dividend (called DRIP—Dividend Reinvestment Plan). Instead of receiving cash, dividends are reinvested at favorable rates (often without fees). Dividend reinvestment magnifies compounding over time: dividends generate returns, which are reinvested, generating more returns. Over decades, reinvested dividends can significantly boost returns. Many companies and investment firms offer DRIP options; some offer discounts on purchases made through DRIP. For long-term investors, dividend reinvestment is a powerful wealth-building strategy.