Dividend Reinvestments (DRIPs)

Dividend reinvestment plans (DRIPs) have become quite common and allow the investor to accumulate a significant amount of shares over time. The idea with drips is that any cash dividends received from owning a stock are automatically reinvested by purchasing new shares in that same stock.

Typically dividend reinvestments result in shares being repurchased in fractions of whole shares as the cash dividend may not be divisible into whole share amounts.  This is similar to mutual fund purchases which generally are in fractional share amounts.

Dividends received from DRIPs are treated the same as cash dividends for tax purposes and taxes are due in the year the dividend was received even though the dividend was reinvested.

The shares purchased by the drip are treated the same as any other stock purchase and the cost basis for these shares is the price paid when reinvested.  Capital gains or losses are realized when these shares are finally sold and get reported to the IRS on schedule d just like any other stock sale.

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