Dividend reinvestment calculator

Why reinvesting dividends matters

A dividend reinvestment plan (DRIP) turns each dividend into more shares instead of cash. Those new shares pay their own dividends, which buy still more shares - a compounding loop that, over decades, accounts for a surprisingly large part of total stock-market returns. This calculator compares reinvesting against taking the dividends as cash.

Worked example

A $10,000 position with a 3% dividend yield and 5% annual price growth, held 20 years:

• Value if you take dividends as cash: about $36,949 (price growth plus uninvested cash dividends)
• Value if you reinvest (DRIP): about $47,922
• DRIP advantage: roughly $10,973 - nearly 30% more, just from reinvesting

The gap widens the longer you hold and the higher the yield, because the reinvested dividends compound rather than sitting idle.

How to use the result

• Raise the horizon to see how dramatically the DRIP advantage grows over 30 or 40 years.
• Compare yields - a higher-yield holding benefits more from reinvestment, all else equal.
• Remember the model assumes dividends are reinvested at the prevailing price; in reality prices vary, which is just dollar-cost averaging in action.

The tax wrinkle

In a taxable account, reinvested dividends are still taxed in the year paid, even though you got no cash - so keep records, because reinvestment also raises your cost basis (which lowers tax when you eventually sell). In a tax-advantaged account (IRA, 401k), there is no current tax and DRIP compounds untaxed.

Common mistakes

• Assuming reinvested dividends are tax-free in a taxable account.
• Forgetting that reinvestment raises cost basis, which matters at sale.
• Chasing high yields without checking whether the dividend is sustainable.

To see the annualized rate behind a result, use the CAGR calculator; to keep your target mix as positions grow, see the portfolio rebalancing calculator.