Dividend reinvestment (DRIP) is one of the most powerful wealth-building strategies available. Instead of taking dividends as cash, you use them to buy more shares—which generate more dividends, compounding your growth over time.
How This Calculator Works
This calculator models dividend reinvestment growth:
- Initial Investment: Starting portfolio value
- Dividend Yield: Annual dividend as percentage of share price
- Dividend Growth Rate: Expected annual increase in dividends
- Share Price Growth: Expected stock appreciation
- Time Period: Investment horizon in years
- Final Value: Projected portfolio value with DRIP
The Formula Explained
Shares After Year N = Initial Shares Ă— (1 + Dividend Yield)^N
For more accurate modeling with growth: Shares grow as dividends buy new shares at current prices, then new shares generate more dividends
This creates a compounding snowball effect that accelerates over time.
Step-by-Step Example
$10,000 Investment with 3% Dividend Yield, 6% Stock Growth
| Year | With DRIP | Without DRIP | DRIP Advantage |
| 10 | $22,800 | $17,900 | +$4,900 |
| 20 | $55,100 | $32,100 | +$23,000 |
| 30 | $137,400 | $57,400 | +$80,000 |
DRIP more than doubles your wealth over 30 years!
Frequently Asked Questions
What is a DRIP (Dividend Reinvestment Plan)?
A DRIP automatically uses your dividend payments to purchase additional shares of the same stock. Instead of receiving $50 in cash quarterly, you get 0.5 more shares. Many brokerages offer automatic DRIP at no cost. Some companies offer direct DRIPs, sometimes at a discount.
How does dividend reinvestment compound?
When you reinvest dividends, you own more shares. More shares generate more dividends. Those new dividends buy even more shares. Year 1: 100 shares pay $300 in dividends. Reinvested: 103 shares. Year 2: 103 shares pay $309. Year 3: 106 shares... The effect accelerates over decades.
Is DRIP better than taking cash dividends?
For long-term growth, DRIP typically wins due to compounding. Take cash only if: (1) You need income now, (2) You want to rebalance into other investments, (3) The stock is fully valued and you'd prefer to invest elsewhere. For growth-focused investors, DRIP is almost always superior.
Are reinvested dividends taxable?
Yes—reinvested dividends are taxable in the year received even though you didn't get cash. You owe taxes on dividends whether you take cash or reinvest. This creates a tax bill without cash to pay it (in taxable accounts). In tax-advantaged accounts (IRA, 401k), this isn't an issue until withdrawal.
Do all stocks pay dividends?
No—growth stocks often pay no dividends, reinvesting profits into business expansion. Dividend-paying stocks tend to be mature, stable companies. Dividend yields typically range from 1-5%. REITs and utilities often pay higher yields. Not paying dividends isn't bad—it's a different growth strategy.
What is dividend yield vs dividend growth?
Dividend yield: Current annual dividend Ă· current share price. A $2 dividend on a $50 stock = 4% yield. Dividend growth: Year-over-year increase in the dividend amount. Dividend aristocrats have raised dividends 25+ consecutive years. High growth can compensate for lower current yield.
How do I start DRIP investing?
Most brokerages offer automatic dividend reinvestment at no cost. Enable it in your account settings (often a checkbox per holding). Trades typically execute at market price on dividend payment date. Fractional shares allow reinvesting the entire dividend, not just whole shares.
What are the best DRIP investments?
Popular DRIP candidates: (1) Dividend ETFs (VYM, SCHD, DGRO) for diversification. (2) Dividend Aristocrats—companies raising dividends 25+ years (JNJ, PG, KO). (3) REITs for high yields. (4) Utilities for stability. Focus on sustainable dividends and growth, not just highest current yield.
Key Points to Remember
- Compounding amplifies over time: The biggest gains come in later years
- Automatic is best: Set DRIP and forget it
- Dividends still taxable: Even when reinvested (in taxable accounts)
- Quality over yield: Sustainable dividend growth beats high risky yields
- Long-term strategy: DRIP works best over decades, not years