How it works
A dividend reinvestment plan (DRIP) automatically converts every cash payout into additional fractional or whole shares, so each future dividend is computed on a slightly larger share count — the quiet mechanism behind most dividend-compounding stories. This calculator models it mechanically: each year your shares produce a dividend, that cash buys more shares at the year-end price, and next year's payout reflects both the bigger share count and any dividend raise. Start with 200 shares at $50 paying $2 annually, assume 5% dividend growth and 4% price growth, and ten years later the plan holds roughly 290 shares worth about $21,400 — around $1,900 of which exists purely because dividends bought dividends. The schedule below shows the accumulation curve, and the chart splits final value between your original shares and everything the DRIP added. Two honest caveats: results assume steady growth rates that real markets refuse to follow in straight lines, and in taxable accounts DRIP shares trigger tax bills along the way since reinvested dividends are still taxable income in the year received.
Formula
shares(t+1) = shares(t) + shares(t) × dividend(t) ÷ price(t+1), with dividend growing g% and price p% yearly
Tips
- Commission-free DRIPs through brokers beat old-style company plans with fees.
- Track cost basis per reinvestment lot — tax time gets painful otherwise.
- Turn DRIP off once you need the income; the switch is instant and free.
- Reinvesting through a downturn buys more shares per dollar — the quiet superpower.
- Model pessimistic growth rates too; plans built only on bull cases break first.
Frequently asked questions
- How much does a DRIP increase returns?
- Over long horizons it adds meaningful ground. In the default scenario, 200 shares become roughly 290 in ten years and nearly $1,900 of the final value comes from dividends that bought other dividends. Over 25 years the reinvested layer typically exceeds the original position entirely at these growth rates.
- Is DRIP better than taking the cash?
- For accumulation-phase investors, usually yes: reinvested dollars keep compounding instead of sitting in checking earning little. For retirees needing income, cash payouts are the point. Mathematically both paths converge if you manually reinvest the cash — the DRIP simply automates discipline and removes the temptation to spend.
- Are reinvested dividends taxed?
- In taxable accounts, yes — reinvesting does not shelter them. Qualified dividends are taxed in the year paid even though you never saw the cash, which is why DRIP lots need careful basis tracking. Inside IRAs and 401(k)s reinvested dividends compound with no annual tax drag at all.
- Do all brokers offer free dividend reinvestment?
- Most major US brokers now offer commission-free DRIPs on stocks and ETFs with fractional settlement, a big change from the fee-charging company plans of the past. Check whether your broker supports fractional reinvestment for small payouts — otherwise sub-share cash sits idle until it accumulates enough for a whole share.
- What happens to my DRIP if the dividend is cut?
- The machine keeps running on whatever is paid: fewer dollars buy fewer shares, and projections reset lower. That is the plan working exactly as designed — automatic buying through bad news. Historically, investors who kept reinvesting through 2008–2009 accumulated heavily discounted shares and recovered fastest afterward.