The dividend reinvestment calculator projects how your portfolio grows when dividends are automatically reinvested (DRIP). Compound growth from reinvested dividends can dramatically increase long-term returns compared to taking dividends as cash.
How Dividend Reinvestment (DRIP) Works
Dividend reinvestment (DRIP) automatically uses dividend payments to purchase additional shares, creating a compounding effect where larger share counts generate larger future dividends. Over long time horizons, this can dramatically increase total returns.
The Power of DRIP
A $10,000 investment with a 3% yield, 5% dividend growth, and 7% price appreciation: with DRIP over 20 years, this grows to approximately $100,000+. Without DRIP, taking dividends as cash, the portfolio might only reach $70,000-80,000. The difference is entirely from compounded reinvestment.
Yield on Cost
Yield on cost shows what percentage your current annual dividend is of your original investment. If you invested $10,000 and now receive $800 in annual dividends, your yield on cost is 8% — even if the stock's current yield (dividend/current price) is lower. This metric rewards long-term dividend growth investors.
Frequently Asked Questions
What is DRIP investing?
DRIP (Dividend Reinvestment Plan) automatically uses dividend payouts to purchase additional shares instead of receiving cash. This compounds your returns over time, as larger share counts produce larger future dividends.
Does DRIP investing really make a big difference?
Yes, significantly over long time horizons. Studies show that reinvested dividends can account for 40-50% of total stock market returns over multi-decade periods. The S&P 500's total return (with reinvestment) has averaged about 10% annually vs ~7% price-only.
Are DRIP dividends taxable?
Yes. DRIP dividends in taxable accounts are taxable in the year received, even if automatically reinvested. This creates a higher cost basis for future capital gains but does not defer the dividend income tax.
What dividend growth rate should I assume?
The S&P 500's historical dividend growth rate is approximately 5-6% per year. For individual dividend growth stocks (Dividend Aristocrats), 5-10% is common. Conservative projections typically use 3-5%.