Robinhood DRIP | Robinhood Dividend Reinvestment Explained
If you are an investor who likes to receive dividends from your stocks, you might be interested in using a dividend reinvestment plan (DRIP) to boost your returns.
A DRIP is a program that allows you to automatically reinvest your dividends in additional shares of the same stock without paying any commission fees. This way, you can compound your investments over time and increase your future dividend payments.
Robinhood, one of the most popular online brokerage platforms, offers a DRIP feature for its users. In this article, we will explain what DRIP is on Robinhood, how to reinvest dividends on Robinhood, and what are the benefits of using Robinhood DRIP.
Key Takeaways
DRIP stands for "Dividend Reinvestment Plan" and refers to a program that allows investors to automatically reinvest their dividend earnings into additional shares of the same stock.
Robinhood DRIP is a feature that allows Robinhood users to automatically reinvest their dividend earnings into additional shares of the same stock, without incurring any commission fees.
The Robinhood DRIP feature is available to all Robinhood users who hold stocks that pay dividends, and can be turned on or off at any time.
What is DRIP on Robinhood?
DRIP stands for Dividend Reinvestment Plan. It is a program offered by some brokerages that allow shareholders to automatically reinvest their dividends in additional shares of the company’s stock. DRIPs are often offered by mutual funds and exchange-traded funds (ETFs), as well as individual stocks.
On Robinhood, DRIP is a feature that allows users to automatically reinvest their dividends in additional shares of the stock that paid the dividend. To use DRIP on Robinhood, you will need to own shares of a stock that offers a dividend and have the DRIP feature enabled for that stock in your account.
Robinhood supports fractional shares, which means you can buy or sell a portion of a share of a stock. This makes it possible for you to reinvest any amount of dividend, even for the small Robinhood average account size. For example, if you receive a $5 dividend from a stock that costs $100 per share, you can use DRIP to buy 0.05 shares of that stock.
How to Reinvest Dividends on Robinhood
To activate DRIP on Robinhood, you need to follow these steps:
Go to account (person at the bottom right)
Tap the menu icon at the top left
Go to investing
Enable dividend reinvestment
After you enable dividend reinvestment, you will see a list of your investments that are eligible for dividend reinvestment. You can choose which investments you want to reinvest dividends for by selecting the circle or checkmark.
You can also disable dividend reinvestment at any time by following the same steps and toggling the switch off.
Benefits of Using Robinhood DRIP
There are several advantages of using DRIP on Robinhood, such as:
Compound your investments easier
One of the main benefits of using DRIP is that it allows you to use dividend payments to generate exponential growth in your portfolio. By reinvesting your dividends, you are increasing your number of shares in a company, which means you will receive more dividends in the future.
This creates a positive feedback loop that can compound your returns over time. As you can see, using DRIP can significantly increase your returns over time compared to taking dividends as cash. You can also sell cash-secured puts and covered calls to further increase your compounding returns.
Increase your future dividend payments
Another benefit of using DRIP is that it can increase your future dividend payments from the same company. By reinvesting your dividends, you are increasing your ownership stake in the company.
This means you will receive a larger share of the company’s profits as dividends. As you can see, using DRIP can increase your dividend income over time compared to taking dividends as cash.
Dollar-cost average into your position
A third benefit of using DRIP is that it can help you dollar-cost average into your position. Dollar-cost averaging is a strategy that involves buying a fixed amount of an investment at regular intervals, regardless of the price fluctuations. This way, you can reduce the impact of market volatility and lower your average cost per share.
By using DRIP to reinvest your dividends, you are essentially buying more shares of the same stock at different prices, depending on when the dividend is paid. This can help you smooth out the price fluctuations and lower your average cost per share over time. Robinhood is not the only broker that offers DRIP investing, so you can check out our article about tastytrade vs. Robinhood to see another broker that offers DRIP.
FAQ
Do You Pay Taxes on Dividend Reinvestments?
Yes, you do pay taxes on dividend reinvestments unless you are using a retirement account such as a Roth IRA or a traditional IRA. Dividends are considered income by the IRS and are taxed at your ordinary income tax rate or at a lower rate if they are qualified dividends. Qualified dividends are dividends paid by U.S. corporations or certain foreign corporations that meet certain criteria.
Even if you use DRIP to reinvest your dividends, you still have to pay taxes on them as if you received them in cash. This is because the IRS considers reinvested dividends as constructive receipt of income. This means that you are deemed to have received the income even if you did not actually receive it in cash.
As you can see, using DRIP does not affect your tax liability on dividends compared to taking dividends as cash.
Does Robinhood have a drip program?
Yes, Robinhood does have a drip program for its users who own stocks that pay dividends. You can enable or disable the drip program for each eligible stock in your account by following the steps in the article above.
Is Drip investing a good idea?
Drip investing can be a good idea if you are a long-term investor who wants to compound your returns and increase your dividend income over time. By using drip investing, you can take advantage of the power of compounding and dollar-cost averaging to grow your portfolio without paying any commission fees.
What is Robinhood?
Robinhood is a financial services company that operates a mobile app-based brokerage for stock trading. The company was founded in 2013 and is headquartered in Menlo Park, California.
With no commission fees, users of the Robinhood app can buy and sell stocks, ETFs, and options. Due to its simplicity of use and lack of trading costs, the app is well-liked among younger investors and has amassed a sizable following. The Robinhood app provides features for tracking and managing investments in addition to trading, including news and real-time market data.
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