Identification

• A DRIP plan is a dividend reinvestment plan. Companies that pay dividends may allow you to automatically reinvest the dividend by buying more shares of the company. This process allows you experience gains on your stock in two ways. First, the appreciation of the stock is realized. Second, the dividends are used to purchase additional shares.
  
  

Significance

• Ordinarily, a stock investment return is measured in terms of simple interest. This is because the stock gains don't compound. The gains are linear. But a dividend-paying stock shares the profits of the company with you while the share price increases, thus producing compound growth if you reinvest the dividends. This grows your savings in your IRA exponentially.
  
  

Benefit

• The benefit of a DRIP plan is that it will shield your dividend payments from income tax, which they would otherwise be subject to. It also allows for a direct reinvestment with the company, thus reducing the fees associated with buying stock through a broker. Because you don't have to pay a broker every time your dividends purchase more shares, you keep more of your money and your savings grows.
  
  

Disadvantage

• With a DRIP plan in an IRA, your risk is concentrated. Dividends are not guaranteed. The appreciation of the stock also is not guaranteed. You may not experience regular growth in your investment every year. If the stock price drops by an amount equal to your dividend payment, you've made no money, even though your dividends purchased more shares.