Dividend Reinvestment (DRIP) Calculator
How a Dividend Reinvestment Plan (DRIP) Works
A Dividend Reinvestment Plan, commonly known as DRIP, is a strategy where an investor automatically reinvests their cash dividends back into additional shares or fractional shares of the underlying stock. Instead of receiving a quarterly check, you use those funds to buy more of the asset that paid you.
The Power of Compounding Dividends
When you use a DRIP, you create a powerful "snowball effect." Not only does your initial investment grow through capital appreciation, but the number of shares you own increases every single quarter. This means your next dividend payment will be larger because you own more shares, which in turn allows you to buy even more shares next time.
Key Metrics Explained
- Annual Dividend Yield: The percentage of the current share price that a company pays out in dividends each year.
- Stock Appreciation: The estimated yearly increase in the stock price itself, independent of dividends.
- Tax Drag: Even if you reinvest dividends, the IRS usually considers them taxable income in the year received (unless in a Roth IRA). This calculator accounts for that "tax drag."
- Yield on Cost (YOC): This shows the dividend yield relative to your original investment. As companies increase dividends over time, your YOC can often exceed 10% or 20% on the original dollars invested.
Example Calculation
If you start with $10,000 in a stock with a 4% yield and add $500 per month, after 20 years with a 5% stock growth rate, your portfolio wouldn't just be the sum of your contributions. Because of the DRIP, your dividends are buying more shares while the price is rising, often resulting in a final balance hundreds of thousands of dollars higher than a standard savings account.