WHAT IS A DIVIDEND REINVESTMENT PLAN ? HOW DOES DRIP INVESTING WORK ?
- KidVestors
- May 16
- 6 min read
Updated: May 21
What you'll learn:
Ever heard the phrase “Don’t eat all your candy at once”? That’s basically what a Dividend Reinvestment Plan (DRIP) is in the world of investing. Instead of taking the cash you earn from your investments (like candy), you put it right back to work so it can turn into more candy. Sweet, right?
What is a Dividend Reinvestment Plan (DRIP)?
Before we get into DRIP investing, let’s first understand the star of the show: dividends.
What’s a Dividend?
A dividend is money a company pays you just for owning its stock. Think of it like a thank-you gift. You believed in the company, bought a piece of it (a stock), and now they’re giving you a little slice of their profits as a way of saying, “Hey, thanks for sticking with us.”
Easy Example:
Let’s say your child owns one share of “KidSnacks Inc.” and that share is worth $100. If KidSnacks Inc. pays a $5 annual dividend, your child gets $5 every year just for owning that share. They didn’t have to do anything. That’s dividend income!
Some companies pay dividends quarterly (every 3 months), so your child would get $1.25 every 3 months in that case.
What Is DRIP investing?
Now here’s where it gets fun. A Dividend Reinvestment Plan or DRIP investing is when instead of receiving that $5 in cash, the company or brokerage automatically uses it to buy more shares (or partial shares) of the same company. So instead of taking your dividend money out to buy a new gadget or toy, it goes right back into growing your investment. It’s like your money is doing jumping jacks and getting stronger all by itself.
DRIP = dividends automatically reinvested into more stock.
Over time, those reinvested dividends earn their own dividends, and then those dividends earn more—and that’s the magic of compound growth.
How to Invest in Dividends
You don’t need to be a stock market expert to start investing in dividend-paying stocks. Here’s a quick beginner-friendly roadmap:
Step 1: Open a Brokerage Account
Parents can open a custodial brokerage account for their kids with platforms like Fidelity or Charles Schwab.
Step 2: Choose Dividend-Paying Stocks
Look for companies that are known for consistently paying dividends. These are usually big, stable companies like:
Apple
Coca-Cola
Johnson & Johnson
McDonald's
Procter & Gamble
You can also find Dividend ETFs (Exchange-Traded Funds), which are like baskets of dividend-paying stocks.
Step 3: Buy Shares
Once you own shares of a dividend-paying company, you’ll start getting paid dividends, usually every quarter (every 3 months).
Step 4: Enable DRIP
Most brokerages give you the option to turn on DRIP. That means any dividend you earn will be automatically used to buy more shares instead of sitting in your account.
Boom. You’re now a DRIP investor!
How Does a Dividend Reinvestment Plan Work?
Let’s break this down using an easy example.
Example time:
Imagine you own 10 shares of ABC Company, which pays a dividend of $1 per share every quarter.
That means every 3 months, you get $10 in dividends (10 shares x $1).
If you cash out the $10, you might buy ice cream. Once you eat it, that money is gone forever.
If you enroll in a DRIP, that $10 will automatically buy you more ABC Company shares (or fractions of shares, depending on the price).
Now, let’s say the stock price is $20 per share:
Your $10 dividend would buy you 0.5 shares.
Now you own 10.5 shares.
Next quarter, you’ll earn dividends on 10.5 shares, not just 10. And the snowball starts rolling faster.
It’s like planting seeds. Each seed grows into a small plant, and then those plants start dropping their own seeds. Eventually, you’ve got a garden full of money trees.
The cool part? DRIP investing is automatic. You don’t need to remember to log in, click buttons, or place trades. It just happens quietly in the background.
Is DRIP Investing Worth It?
The short answer? For many investors, absolutely.
Here’s why:
The pros:
Compound growth:Your dividends buy more shares, which earn more dividends, which buy more shares...it’s the classic snowball effect.
No temptation to spend: Since dividends are automatically reinvested, you don’t even see the cash hit your account, removing the urge to splurge.
Fractional shares magic: Even if your dividend isn’t enough to buy a full share, many DRIP programs let you buy fractions of a share. Every little bit counts.
No transaction fees (in many cases): Some DRIP plans don’t charge fees for reinvesting dividends, saving you money over time.
The cons:
Less cash flexibility:You won’t have cash in hand, so if you need money, you’d have to sell shares.
Not all companies offer DRIP directly: Some require you to enroll through your brokerage, which is still easy, but worth noting.
DRIP investing is a great strategy for long-term investors who want their money to quietly grow over time—especially for kids and teens with more time on their side.
What are the Best DRIP Stocks?
While there’s no such thing as the “perfect” DRIP stock, here are some popular dividend-paying companies that are often part of DRIP investing strategies:
Coca-Cola (KO): A classic. Known for its reliable dividends for decades.
Johnson & Johnson (JNJ): This healthcare giant has been increasing its dividends every year for over 50 years.
Procter & Gamble (PG): Makers of everyday products (like Tide and Pampers) with consistent dividend payments.
McDonald’s (MCD): Yep, even the golden arches pay you for being a shareholder.
PepsiCo (PEP): Not just about soda: Pepsi owns snack brands too, and they pay dividends.
Bonus tip:
Dividend ETFs like Vanguard Dividend Appreciation ETF (VIG) or SPDR S&P Dividend ETF (SDY) also pay dividends and can be part of a DRIP strategy.These are bundles of dividend-paying stocks, which is a great way to diversify.
DRIP Investing for Kids and Teens
If we're being honest, kids and teens aren’t exactly counting down the days to get their dividend checks.
But DRIP investing can actually be an awesome lesson in patience, delayed gratification, consistency, and compound growth.
Here’s why DRIP investing is perfect for young investors:
Long time horizon:The younger you start, the longer your snowball has to roll downhill (and the bigger it gets).
No need to babysit investments: DRIP takes the guesswork out of “what do I do with this dividend?” It reinvests automatically.
It makes investing fun and visual: Kids can see how owning a little piece of a company leads to more pieces over time kind of like leveling up in a game.
Example for kids:
Let’s say your 10-year-old invests $100 in a dividend-paying stock that earns 3% in dividends each year.
In year 1, they’d earn $3.
With DRIP, that $3 buys more stock, which earns dividends too.
Over 10, 20, 30 years, that $100 could turn into hundreds more all while they focused on school, sports, and friends.
How KidVestors helps:
At KidVestors, we make lessons like DRIP investing easy and engaging for young learners, showing them how small actions today can turn into big wins tomorrow.
We teach kids and teens what dividends are, how to track them, and how to reinvest them all through a fun, gamified experience. As students earn financial milestones, they also earn KV Bucks that can be converted to real investing dollars in supported custodial accounts.
We explain investing using animated videos, real-life analogies, and rewards that make financial literacy feel less like a boring lecture and more like leveling up in a video game.
Think of it like Roblox meets Wall Street.
Don't Sleep On DRIP
So, what’s the big takeaway?
Dividend Reinvestment Plans (DRIP) are like the cheat code of investing: letting your dividends automatically buy you more shares, helping you build wealth over time without lifting a finger.
It’s not flashy. It’s not get-rich-quick. But it works. And the earlier you or your kids start, the more powerful that snowball becomes.
For kids and teens, DRIP investing is about building patience, understanding how compounding works, and seeing firsthand how small seeds today can grow into financial forests tomorrow.
So next time you (or your young investor) get a dividend, think twice before spending it. Try practicing delayed gratification and see how big it can grow instead.
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