Dividend Reinvestment Plans (DRIPs) are one of the oldest and quietest power tools in investing. Instead of receiving dividend payments as cash, the company (or broker) automatically uses those dividends to buy more shares of the same stock. Small amounts at a time, often with no fees. Over decades, the effect on a portfolio is enormous. For a kid, DRIPs are an ideal teaching tool: they make compounding visible in real time, every quarter, with no effort required after the initial setup.
What a DRIP Actually Does
A simple example. A kid owns 10 shares of Coca-Cola (KO) at $60/share. Coca-Cola pays a $1.88/share annual dividend (paid quarterly at $0.47/share). Without a DRIP:
- Every quarter, $4.70 in cash lands in the brokerage account (10 × $0.47)
- The cash sits there unless the kid does something with it
- After a year, $18.80 of cash has accumulated
With a DRIP enabled:
- Every quarter, $4.70 of cash automatically buys MORE Coca-Cola shares — even fractional ones (e.g., 0.078 of a share at $60)
- Next quarter, the new (slightly larger) holding generates a slightly larger dividend ($0.48 instead of $0.47)
- The dividend stream itself starts growing, even before any price appreciation or company dividend increases
- After 30 years of reinvestment, the original 10 shares might have grown to 18–25 shares purely through dividend reinvestment
Why DRIPs Are Especially Good for Kids
- Compounding becomes visible — the share count goes up every quarter. The kid can literally see the position growing without adding money
- No fees on most brokerage DRIPs — nearly all major brokers offer free dividend reinvestment
- Fractional shares mean even tiny amounts get reinvested — a $0.30 dividend on a $200 stock buys 0.0015 of a share. Adds up
- Dollar-cost averaging built in — the dividend reinvestment happens at whatever price the stock is at on that day, smoothing out the average purchase price over years
- No decisions required — the setup is one click. Then the system runs on autopilot for decades
How to Set Up DRIPs at a Brokerage
At Fidelity, Schwab, Vanguard, and most major brokers, dividend reinvestment is a per-account or per-position setting:
- Account level: “Reinvest all dividends in the original security” — one setting covers every dividend-paying holding
- Per-position: “Reinvest dividends in this stock” on each individual holding. More granular if you want some dividends as cash
- Default off, has to be enabled — most brokers default to paying dividends as cash. The kid (or parent) has to switch it on explicitly
Most brokerage DRIPs allow fractional share purchases, which means every penny of dividend gets reinvested. The setup takes 30 seconds; the effect runs for decades.
Direct DRIPs from the Company
Some companies offer direct DRIPs through their transfer agents (Computershare is the most common), bypassing brokers entirely. Direct DRIPs can:
- Let you buy initial shares directly from the company at low or no cost
- Accept small ongoing cash deposits — e.g., $25/month directly to buy more shares of one company
- Include automatic dividend reinvestment
Older generations used direct DRIPs because brokerage commissions made small purchases prohibitive. Today, with brokerage commissions at $0 and fractional shares widely available, brokerage DRIPs are usually the simpler choice. Direct DRIPs are still useful for specific situations (e.g., a relative buying a single share for a newborn as a gift via Computershare).
DRIPs Plus ETFs: The Real Setup
The teaching power of a single-stock DRIP comes from watching the share count tick up. The wealth-building power comes from doing the same thing with broad ETFs:
- VTI (Total Stock Market) with DRIP on — quarterly dividends automatically buy fractional shares of the entire US market
- SCHD (Schwab US Dividend Equity) — a dividend-focused ETF with higher dividend yield. Powerful DRIP candidate
- VOO or SPY (S&P 500) — smaller dividends than dedicated dividend funds, but the share count still creeps up over time
For a kid’s long-horizon portfolio, the realistic setup: a single familiar dividend-paying stock as the teaching tool, plus broad-market ETFs as the bulk of the portfolio, all with DRIP enabled.
Tax Implications
- UGMA/UTMA accounts: dividends are taxable income to the child. Most kid accounts are well within the kiddie tax exemption thresholds, so the practical impact is small or zero
- Custodial Roth IRA: dividends grow tax-free. The cleanest possible setup for DRIP-style accumulation
- Reinvested dividends still count as taxable income — even though you didn’t take the cash. Keep records for tax filing. The broker reports this on a 1099-DIV
Common Mistakes
- Forgetting to enable DRIP — most brokerage accounts default OFF. The dividends pile up as uninvested cash and lose the compounding effect
- Picking the highest-yield stocks just for big dividends — very high dividend yields often signal trouble at the company. A 4% sustainable dividend usually beats a 9% questionable one
- Forgetting about tax reporting — reinvested dividends are still taxable. Keep records
- Selling reinvested shares without tracking cost basis — complicates tax reporting later
The Bottom Line
DRIPs turn dividends into more shares automatically, which turn into more dividends, which turn into more shares. For a kid’s portfolio, the effect is dual: a powerful visual teaching tool (watching share counts grow quarterly) and a meaningful wealth-building accelerant (small amounts compounding over 50 years). Enable DRIP at the account level on Fidelity, Schwab, or Vanguard — one click. Pair a dividend-paying single stock (the textbook) with broad ETFs (the bulk). Then leave it alone for decades. Few investing setups produce so much from so little ongoing effort.
Further Reading
This article is educational only and is not investment, financial, tax, or legal advice. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Product features, fees, and rules change over time. Consult a qualified financial advisor for guidance on your specific situation.