Dividend Reinvestment Calculator (DRIP)

What is a DRIP?

A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to purchase additional shares of the same stock. This harnesses the power of compound growth, as your increasing share count generates more dividends, which buy even more shares.

How It Works

1. You receive dividend payments from your shares
2. Dividends are automatically used to buy more shares
3. Your growing share count generates more dividends
4. The cycle repeats, accelerating your wealth accumulation

Benefits of DRIP

• Harness the power of compound growth
• Automated investing without additional effort
• Often available with no transaction fees
• Build positions over time through market cycles
• Accelerate wealth building without new capital

Stock Price Growth

The optional growth rate field allows you to model scenarios where the stock price appreciates over time. This shows the combined power of dividend reinvestment and capital appreciation.

Long-Term Strategy

DRIP strategies are most powerful over long time periods. The compounding effect becomes more dramatic as years pass, making this an excellent approach for retirement savings and long-term wealth building.

The Snowball Effect

Year 1, you earn $200 in dividends and buy 4 extra shares. Year 2, those 4 shares also pay dividends, buying you even more shares. Year 10, your snowball has grown massive - you're buying dozens of shares annually from dividends alone, without investing new capital.

This is why dividend aristocrats (companies that raised dividends for 25+ consecutive years) are DRIP favorites. Not only do you buy more shares, but each share pays increasing dividends. The dual compounding effect is powerful.

DRIP vs Manual Reinvestment

Most brokers offer free DRIP programs that automatically reinvest dividends without trading commissions. This is ideal for long-term investors who want hands-off growth. Manual reinvestment gives you control but requires active management and may incur fees.

One advantage of manual control: you can redirect dividends to undervalued positions. If Stock A is overpriced but Stock B is on sale, take Stock A's dividends and buy Stock B instead. This tactical approach requires more attention but can enhance returns.

Tax Considerations

DRIP doesn't shield you from taxes. Dividends are taxable income whether you take them as cash or reinvest them. You'll owe taxes annually on all dividends received - but your cost basis increases with each DRIP purchase, reducing future capital gains.

For tax-advantaged accounts (IRAs, 401(k)s), DRIP is a no-brainer. The dividends compound tax-free (Roth) or tax-deferred (traditional), maximizing long-term growth. Use our Capital Gains Tax Calculator to understand your tax situation.

Dividend Yield Trap

Don't chase ultra-high yields blindly. A 15% dividend yield sounds amazing, but often signals trouble - the stock price has crashed, inflating the yield percentage. If the company cuts or eliminates the dividend, you're left with a falling stock and no income.

Focus on sustainable, growing dividends from financially healthy companies. A 3% yield growing 7% annually beats a stagnant 6% yield over time.

Frequently Asked Questions