What happens when dividends are paid and you participate in a DRIP?

• A. Dividends are reinvested to purchase additional shares.
• B. Dividends are paid as cash only.
• C. Dividends are taxed away immediately with no reinvestment.
• D. Dividends reduce the number of shares you own.

Answer: (A)

Dividends are reinvested to purchase additional shares. When you participate in a DRIP, every dividend you receive is automatically used to buy more shares of the same stock, often including fractional shares. You don’t need to add cash yourself, and your total number of shares grows over time, which helps your investment compound. Taxes on the dividend are typically due in the year it’s paid, even though you’re reinvesting. This makes reinvestment the correct description, whereas cash-only dividends, immediate taxation with no reinvestment, or a reduction in shares do not fit.