A Dividend Reinvestment Plan (DRIP) primarily encourages investors to do what?

• A. Reinvest dividends to buy more shares
• B. Take cash payouts with higher taxes
• C. Sell shares to rebalance portfolio
• D. Use dividends to purchase bonds

Answer: (A)

A Dividend Reinvestment Plan is all about turning the dividends you receive into more shares of the same stock. When the company pays a dividend, the plan automatically uses that cash to buy additional shares for you (often including fractional shares). This automatic reinvestment builds your stake over time, and because those new shares also generate dividends, you get a compounding effect. It’s especially appealing for long-term growth since it increases your share count and potential future returns without you needing to take cash now or make separate purchases. The other ideas—taking cash payouts, selling shares to rebalance, or using dividends to buy bonds—don’t capture the automatic, ongoing reinvestment feature characteristic of a DRIP.