What does a DRIP provide to an investor?

A Dividend Reinvestment Plan (DRIP) allows investors to reinvest cash dividends received from their investments into additional shares of the underlying stock, rather than receiving cash payments. This reinvestment can sometimes come at a discounted price, thus enabling compound growth over time without the investor needing to use additional cash to purchase more shares.

Choosing stock dividends in place of cash dividends means that instead of receiving cash payouts, investors will accumulate more shares, which can be beneficial for long-term growth and compounding returns. As the value of the stock potentially increases over time, the total investment value can grow more significantly with compounded shares.

In contrast, the other choices do not accurately describe the function of a DRIP: cash dividends, guaranteed returns, and tax-free income do not encapsulate the nature of how a DRIP operates. Cash dividends are typically received outside a DRIP, while there is no guarantee of returns in the stock market, and the income from dividends can be subject to taxation depending on the investor's specific circumstances and tax laws.