A Dividend Reinvestment Plan (DRIP) is a program offered by many companies and brokerage firms. It allows investors to automatically reinvest their dividends into additional shares or fractional shares of the company's stock, instead of receiving cash payouts. This approach is particularly appealing for long-term investors seeking to compound their returns.

When a company declares a dividend, participants in a DRIP use those funds to purchase more shares, often at little to no cost. Some companies even offer shares at a discount through their DRIP programs, enhancing the value of reinvestments. DRIPs typically eliminate the need for manual reinvestment, as the process is automated once an investor enrols.

Investors benefit from dollar-cost averaging since dividends are reinvested regularly, regardless of the stock’s price. This helps mitigate the impact of market volatility. Over time, the accumulation of shares can significantly increase an investor's holdings and compound growth.

However, DRIPs are not without limitations. They may lead to over-concentration in a single stock, limit portfolio diversification, and require careful record-keeping for tax purposes. While DRIPs can be a powerful tool for building wealth, they are most effective when aligned with an investor’s broader financial strategy and objectives.