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A dividend reinvestment program or dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company. The investor does not receive dividends directly as cash; instead, the investor's dividends are directly reinvested in the underlying equity. The investor must still pay tax annually on his or her dividend income, whether it is received as cash or reinvested.
DRIPs allow the investment return from dividends to be immediately invested for the purpose of price appreciation and compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. Some DRIPs are free of charge for participants, while others do charge fees and/or proportional commissions.
Similarly income trusts and closed-end funds, which are numerous in Canada, can offer a distribution reinvestment plan and a unit purchase plan which operate principally the same as other plans.
Because DRIPs, by their nature, encourage long-term investment rather than active trading, they tend to have a stabilizing influence on stock prices.