A dividend reinvestment plan, often shortened to DRIP, is the formal scheme through which dividend reinvestment is offered to shareholders: instead of receiving a cash dividend, a participant has the money used to acquire further shares in the same company. The main entry explains the idea and its effect on long-term returns; this entry describes the plan as an arrangement.
Plans are run either by the company, through its registrar or transfer agent, or by a broker for its own customers. In a market-purchase plan the administrator pools participants' dividends and buys existing shares on the market, charging a small dealing fee. In a new-issue plan the company issues fresh shares, sometimes at a discount, which conserves its cash; this is close to a scrip dividend. Holders join by a standing instruction, which operations teams treat as an election on each dividend. Purchases often create a fractional share or leave a small cash balance carried forward.
Reinvested dividends are normally taxed as income in the same way as cash dividends, and each purchase forms a separate tax lot.