A dividend reinvestment plan -- or DRIP -- allows you to use the dividends generated by ownership of shares of stock to purchase more shares of the same stock. The acronym DRIP accurately describes how your investment grows, little by little. DRIPs allow current shareholders to bypass the broker and buy directly from the company, eliminating the broker's commission fee. When you are ready to sell your shares, you will be doing it on your own since there is no broker involved.
Read your plan's prospectus or visit the plan administrator's website to find out if your DRIP offers market orders. If offered, you may contact the transfer agent to place a market order to sell your shares. Shortly after receiving the order, the trade occurs. DRIPs are not actually sold on the market. When you sell your shares, the issuing company purchases the shares back at the current market price.
Order a request for sale. This is the most widely used method of selling DRIP shares. Since the companies buy and sell shares in bulk to avoid charging transaction fees, you will need to submit a written or verbal request to have your shares sold on the market. It often takes several business days before your request is approved and the stocks are sold. Check your monthly statement for specific instructions on submitting a sale request.
Add the reinvested dividends and the share's initial purchase price. Divide the result by the total number of shares that you hold at the time of sale to determine the cost basis of your DRIP. It is important to know the cost basis because once a DRIP is sold you are liable for capital gains taxes.
Calculate capital gains tax by multiplying the cost basis by the number of shares you sold. Subtract the resulting number from the sale proceeds.
Report any dividend income on your taxes. Companies issue a Form 1099-DIV stating the amount paid to all investors who receive a payout of at least $10 for the year.
- Yahoo Finance: Tax Considerations of DRIP Investing
- The Investment FAQ: Trading - Direct Investing and DRIPs
- Investor.gov. "Stocks." Accessed May 16, 2020.
- DRIP Investor. "The Drip Answer Report." Accessed May 16, 2020.
- Brigham Young University. "22. Investing 5: Understanding Stocks," Page 465. Accessed May 16, 2020.
- Forbes. "Dividends and Dollar-Cost Averaging Provide Antidote to Bear Markets." Accessed May 16, 2020.
- DRIP Investor. "DRIP Investing Basics." Accessed May 16, 2020.
- Internal Revenue Service. "Frequently Asked Questions: Stocks (Options, Splits, Traders) 2." Accessed May 16, 2020.
- Internal Revenue Service. "Stocks (Options, Splits, Traders)." Accessed May 16, 2020.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.