What is a dividend and what is a dividend reinvestment plan (DRIP)?

• A. A dividend is a distribution of earnings to shareholders; a DRIP automatically reinvests dividends to purchase additional shares.
• B. A dividend is a return of principal; DRIP pays cash.
• C. A dividend is a capital gain from selling shares; DRIP taxes profits.
• D. A dividend is a bank interest; DRIP is a loan.

Answer: (A)

Dividends are payments companies make to their shareholders from earnings, usually paid in cash per share (and sometimes as extra shares). A dividend reinvestment plan automatically uses those dividend payments to buy more shares of the company, often without commissions and even allowing fractional shares, which helps your investment grow faster over time. The other ideas confuse dividends with returning principal, capital gains from selling, bank interest, or loans, and they misstate what a DRIP does.