DRIP calculator: dividend reinvestment plan growth

How a dividend reinvestment plan works

A DRIP (dividend reinvestment plan) uses every dividend to buy more shares of the same stock or fund, usually automatically and often in fractional shares. Those new shares pay dividends of their own, so the share count grows every payment, even when you add no money. Over decades the reinvested dividends become a large part of the final value: in the S&P 500, roughly a third to a half of the total return since 1926 came from dividends and their reinvestment, depending on the period.

The calculator above tracks three things a simple growth calculator hides: how many shares you own, the dividend income those shares pay each year, and your yield on cost (this year's dividends divided by what you paid in). The table shows every year, so you can see the moment when the dividends alone buy more shares than your monthly contribution. If you only want the income figure for an amount and a yield, the dividend calculator is the quicker tool.

The two engines: dividend growth and reinvestment

Two different things compound here. Reinvestment adds shares. Dividend growth raises the payment per share: a company or index that lifts its dividend by 5% a year doubles the payment in about 14 years. Together they explain why a 3% yield today can become a 10% or higher yield on your original cost after two decades, without the share price doing anything special. Enter 0% dividend growth to see reinvestment on its own.

What the inputs mean

Dividend yield is this year's dividends divided by the share price (3% on a $100 share means $3 a year). Dividend growth is how fast the payment per share rises. Share price growth is the price change on top of the dividend. The total return you expect is roughly yield plus price growth. Tax on dividends is deducted from every payment before it is reinvested; enter 0% for a tax-sheltered account. Payments are quarterly, the most common schedule for US stocks and many ETFs; choose monthly for monthly payers.

What this calculator does not do

It assumes a constant yield, constant growth and a dividend that is never cut. Real dividends are cut in recessions (in 2009 S&P 500 dividends fell by about a fifth), prices fall by far more than they rise in a bad year, and a high yield is often a warning rather than a gift. Use the figures as an illustration of the mechanics, then look at the real history: the growth calculator shows the S&P 500 with every dividend reinvested, and the Research Terminal shows how deep the falls were on the way.

Frequently asked questions