What is a dividend reinvestment plan?

A dividend reinvestment plan is one that allows investors to automatically roll over their earnings into the same company, constantly reinvesting the profits in additional shares. The plans, known as DRIPs, often offer shares that cost less than actively traded shares, according to U.S. News & World Report.

Many companies offer DRIPs exclusively to individuals who already own regular shares. In that case, Kiplinger advises investors to purchase a single share through a broker and then enroll in the corporation's DRIP. Most DRIPs don't charge a setup fee, but some charge a fee when investors reinvest their dividends in new shares, notes U.S. News & World Report.