What is a DRIP?

In the financial world, it’s not  a leaky faucet but a Dividend Re Investment Plan.  Encouraged by many companies, it is designed to automatically reinvest dividends back into a firm’s stock.

There are several cautionary notes about using DRIPs.  First, continual re-investing can lead to over-concentration in a single stock.  Second, because your investment is on autopilot, a change in the fortunes of a company can result in significant losses.  Third, long term investors often lose track of the tax cost basis of the stock they own, causing serious tax problems when it comes time to sell.

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