What is the purpose of a dividend reinvestment plan (DRIP)?

The purpose of a dividend reinvestment plan (DRIP) is to automatically reinvest dividends that investors would typically receive in cash into additional shares of the company's stock. This mechanism allows investors to acquire more shares without incurring brokerage fees, essentially compounding their investment over time. By reinvesting dividends, shareholders can benefit from the potential for increased returns through the accumulation of more shares, which in turn can generate higher future dividends and capital appreciation. This strategy is particularly appealing for long-term investors who wish to build their holdings and maximize the growth of their investments without the immediate need for cash payouts.