Stockholders can choose a set-it-and-forget-it option to automatically reinvest their dividends to purchase more of that stock. Reinvesting their dividends and accumulating more shares give an investor the potential to compound their return and grow their wealth if the stock performs well.

A dividend reinvestment plan (DRIP) can apply to any dividend-paying security but is most common with publicly traded companies. With most opt-in DRIPs, investors automatically buy discounted-price shares or fractions of shares directly from the company with little or no commission fee. For investors, it’s an opportunity to accumulate more ownership shares in a company at a reduced price. And with the ability to buy fractional shares, investors can put every dividend dollar to work.

Reinvested dividends are taxed the same as if they were cashed out.