How does a dividend reinvestment plan (DRIP) work?
A DRIP uses each dividend to buy more shares instead of paying it out as cash. Those new shares earn dividends of their own, so the share count and the income both compound. Over decades, reinvesting typically accounts for a large share of a dividend portfolio’s total return.
“I invest $10,000 plus $500 a month in stocks yielding 3.5%, with dividends growing 6% and prices 5% a year. Where am I after 20 years, reinvesting?”
About $349,948, paying $11,528 a year in dividends after a 15% tax. You put in $130,000. Try this scenario
“And if I take the dividends as cash instead?”
The portfolio reaches about $229,435, plus $67,309 of cash dividends collected along the way. Reinvesting comes out $53,204 ahead. Try this scenario
What is dividend growth, and why does it matter?
Dividend growth is the yearly rise in the dividend per share. A 3.5% yield growing 6% a year pays about twice as much per share after 12 years. Combined with reinvestment and new contributions, growth is what turns a modest yield into a large income stream.
“What about 30 years instead of 20, still reinvesting?”
About $913,887, paying $33,194 a year after tax. Ten more years multiplies the result 2.6 times: compounding does its heaviest lifting at the end. Try this scenario
What is yield on cost?
Yield on cost is this year’s dividend income divided by what you originally invested. As dividends grow, it climbs well above the yield you bought at: a 3.5% starting yield with 6% growth reaches a 10% yield on cost in the plan above. It measures income growth, not current value.
“A single $100,000 investment, no further contributions, held 25 years?”
About $758,943, paying $26,400 a year after tax: a 31% gross yield on the original $100,000. Try this scenario
How do taxes affect dividend reinvestment?
In a taxable account every dividend is taxed when paid, even if you reinvest it, so less money buys new shares. That drag compounds. Holding dividend stocks in an IRA or 401(k) avoids it until withdrawal; enter a 0% tax rate to model a tax-advantaged account.
“Same 20-year plan, but in an IRA with no dividend tax?”
About $378,114, $28,166 more than the taxable account, paying $14,608 a year. Try this scenario
“Is a high yield better? 7% yield, but only 1% dividend and price growth?”
It ends lower at about $297,566 but pays more now: $16,743 a year after tax. High yield with little growth trades future value for present income. Try this scenario
Dividend FAQ
Is reinvesting dividends always better?
For building wealth, usually: reinvested dividends buy shares that pay more dividends. Taking the cash makes sense when you need the income, want to rebalance into other holdings, or are already living off the portfolio. Taxes are the same either way in a taxable account.
Are dividend stocks better than growth stocks?
Not inherently. Total return is dividends plus price growth, and a company that pays no dividend can reinvest those profits in the business instead. Dividend stocks suit investors who value steady, rising income; this calculator shows how much of the result comes from dividends.
How much do I need to live off dividends?
Divide the yearly income you need by the yield. At a 4% yield, $40,000 a year takes about $1,000,000. Dividend growth helps the income keep pace with inflation. The FIRE calculator works through the same question using a safe withdrawal rate instead.
Can dividends be cut?
Yes. Companies cut or suspend dividends in hard times: many did in 2008–2009 and 2020. This calculator assumes steady growth, so test a lower dividend growth rate to see how sensitive your plan is. Diversified dividend funds spread that risk across many companies.