How the DRIP calculator works
The calculator runs two identical portfolios side by side. In the first, every dividend is reinvested in more shares on its payment date. In the second, dividends are paid out as cash and set aside. Both portfolios get the same starting investment, the same monthly contributions, the same dividend growth and the same share price path. The only difference is what happens to the dividends, so the gap between the two lines is exactly what reinvestment adds.
The "value taking cash" figure includes all the cash dividends you collected (without investing them elsewhere), so the comparison is fair: it is not just the shares, it is everything the cash path leaves you with.
The math of dividend reinvestment
On each payment date:
Dividend = Shares × (Annual dividend per share ÷ Payments per year) × (1 − Tax rate)
New shares = Dividend ÷ Share price on that date
The new shares receive dividends at the next payment, which buy still more shares. Over long periods two growth engines stack on top of each other: the share count rises from reinvestment, and the dividend per share rises as the company increases its payout. That is why the income lines in the table pull apart faster every decade.
Example: DRIP over 10, 20 and 30 years
$10,000 invested once in a stock priced at $40 yielding 4%, with the dividend and price each growing 5% a year, quarterly payments and no taxes (as in an IRA):
| Years | Shares with DRIP | Value with DRIP | Value taking cash* | Income/yr with DRIP | Income/yr taking cash |
|---|---|---|---|---|---|
| 10 | 367.8272 | $23,966 | $21,320 | $913 | $621 |
| 20 | 541.1874 | $57,437 | $39,759 | $2,188 | $1,011 |
| 30 | 796.2538 | $137,655 | $69,795 | $5,244 | $1,646 |
* Shares plus all dividends collected as cash, not reinvested elsewhere.
After 10 years the difference is modest. After 30 years, reinvesting has roughly 3.2× the share count and pays 3.2× the annual income of taking cash. Time is the main ingredient.
Taxes: the hidden drag on DRIP in a taxable account
In a regular brokerage account, reinvested dividends are taxable in the year they are paid, even though you never receive the cash. Qualified dividends are taxed at 0%, 15% or 20% federally depending on your income; ordinary dividends at your income tax rate. Using the same example over 30 years, a 15% dividend tax reduces the reinvested portfolio from $137,655 to about $115,780 — and you would pay that tax from other money each year. Holding dividend payers in an IRA, Roth IRA or 401(k) avoids this drag.
Keep records: each reinvestment is a new purchase with its own cost basis. Your brokerage tracks this for shares bought after 2011, but if you move accounts or use a company DRIP, keep your statements so you do not pay tax twice on the same dividends when you sell.
When reinvesting may not be the best choice
- You need the income. In retirement, taking dividends as cash can cover living expenses without selling shares.
- Your portfolio is out of balance. Taking cash and investing it in an underweight asset is a low-cost way to rebalance.
- A single position is getting too large. Reinvesting concentrates more money in the same company.
- You want to avoid many small tax lots in a taxable account.
For a single-portfolio projection with yield on cost, use the dividend calculator. To see how interest-on-interest works in its simplest form, try the compound interest calculator.
Frequently asked questions
What is a DRIP?
A DRIP (dividend reinvestment plan) automatically uses each dividend payment to buy more shares of the same stock or fund instead of paying it to you as cash. Most US brokerages offer free automatic reinvestment, including fractional shares, and some companies run their own direct DRIP programs.
Are reinvested dividends taxed?
Yes, in a taxable account. Reinvested dividends are taxed in the year they are paid exactly as if you had received cash, so you may owe tax without receiving any money. Each reinvestment also adds to your cost basis, which lowers capital gains tax when you sell. In an IRA or 401(k), dividends are not taxed when paid.
Should I reinvest dividends or take cash?
Reinvesting usually makes sense while you are building wealth and do not need the income, because it buys more shares that pay more dividends. Taking cash makes sense when you need the income, for example in retirement, or when you prefer to direct the money to other investments to rebalance your portfolio.
How is DRIP different from compound interest?
The mechanism is similar: earnings are added to the base and earn more earnings. The difference is that dividends and share prices are not fixed. A company can raise, cut or suspend its dividend, and the share price at which you reinvest changes every time.
Does this DRIP calculator include share price growth?
Yes. Set the price growth rate and every reinvested dividend buys shares at the projected price on its payment date. Higher price growth means each dividend buys fewer shares but the portfolio is worth more.
Not financial advice. These figures are hypothetical and assume a constant rate of return. Real investments go up and down, past performance does not predict future results, and taxes and fees vary. Consider speaking with a licensed financial professional before making investment decisions. See our full disclaimer.