Dividend Reinvestment: formulas, examples, FAQs

Dividend reinvestment (DRIP) in plain English

Dividend reinvestment is the “snowball effect” of dividend investing: instead of taking cash dividends, you automatically use those dividends to buy more shares. More shares generate more dividends next time, which buy even more shares, and so on. This is called a DRIP (Dividend Reinvestment Plan). Over long time horizons, the compounding can be dramatic — especially when you also add regular contributions and the dividend per share grows over time.

What this calculator does

This Dividend Reinvestment Calculator simulates your portfolio period by period (monthly, quarterly, semiannual, or annual). It tracks: (1) your total contributions, (2) total dividends paid, (3) how many shares you own after each reinvestment, and (4) your ending portfolio value. You can also include assumptions for share price growth, dividend growth, optional reinvestment discount (some DRIPs buy shares slightly below market price), and dividend taxes (if you want a more conservative estimate).

Core formulas (Omni-level breakdown)

1) Dividend per share per period

Dividend yields are typically quoted annually. If the stock price at the start of a period is P and the annual dividend yield is y (as a decimal), then the annual dividend per share implied by the yield is:

Annual dividend per share = P × y

If dividends are paid m times per year (m = 12 for monthly, 4 for quarterly, 2 for semiannual, 1 for annual), then:

Dividend per share per period = (P × y) / m

2) Dividends received in a period

If you own S shares at the dividend record date, then the gross dividends paid that period are:

Gross dividends = S × dividend per share per period

If you model dividend taxes (tax rate t), the reinvestable dividends become:

Reinvestable dividends = Gross dividends × (1 − t)

3) New shares purchased via reinvestment

If the reinvestment purchase price is Pᵣ, then new shares bought from dividends are:

New shares from dividends = Reinvestable dividends / Pᵣ

If your plan offers a DRIP discount of d (e.g., 2% discount), then:

Pᵣ = P × (1 − d)

4) Share price growth and dividend growth

To estimate long-term outcomes, we often model average growth rates. If the annual share price growth is g, we convert it to a per-period growth rate:

Per-period price growth = (1 + g)^(1/m) − 1

Then each period updates the price:

P_next = P × (1 + per-period price growth)

Dividend growth works similarly. Many investors prefer modeling dividend growth as growth in the dividend per share (not necessarily the yield). This calculator approximates that by growing the dividend per share each period. In real life, yield can change because price changes or companies adjust dividends — so treat results as scenario planning, not a guarantee.

5) Ending portfolio value and CAGR

At the end of the simulation, you own S_end shares at price P_end:

Ending value = S_end × P_end

A helpful summary metric is CAGR (compound annual growth rate) from your total out-of-pocket contributions to the ending value:

CAGR ≈ (Ending value / Total contributions)^(1/years) − 1

Because contributions happen over time, this CAGR is an approximation. If you want a precise money-weighted return (IRR/XIRR), use an IRR tool.

Worked example (quick intuition)

Imagine you invest $10,000 into a dividend stock priced at $100/share (100 shares). Dividend yield is 3% paid quarterly, and you reinvest. Assume the share price grows 5% per year and the dividend per share grows 4% per year. If you also add $200/month, you’ll see two compounding engines working together:

• Contribution compounding: your deposits buy new shares over time.
• Dividend compounding: those shares generate dividend cashflows that buy even more shares.

Over long horizons, the “shares owned” line often accelerates because reinvestment creates a feedback loop: dividends buy shares → shares buy dividends.

How to use this tool (best practices)

• Use conservative assumptions: if this is for planning, try a modest price growth rate and a realistic dividend growth rate.
• Match reality: pick the dividend frequency your investment actually pays.
• Taxes matter: in taxable accounts, dividend taxes can reduce reinvestment; in some retirement accounts they may not apply annually.
• Run multiple scenarios: base / optimistic / conservative gives you a range instead of a single “magic” number.

FAQs

• Does DRIP always beat taking dividends in cash?

  Not always. DRIP boosts compounding, but cash dividends can be useful for income, diversification, or rebalancing. DRIP is most powerful when you’re still accumulating assets and investing for the long term.

• What if the dividend yield changes?

  Real yields change as price changes and companies adjust dividends. This calculator holds your starting yield as a baseline and uses dividend growth to evolve the dividend per share over time. To stress test, run different starting yields and growth rates.

• Why show “total dividends” if I reinvested everything?

  It shows how much cash the investment produced. Even if reinvested, dividends are a major driver of long-term compounding for many strategies.

• Do fractional shares matter?

  Many brokerages allow fractional shares, and DRIPs often do too. This calculator assumes fractional shares, which is realistic for modern platforms.

• Is this financial advice?

  No. It’s an educational scenario model. Markets and dividends can change — use it for planning and comparison, not as a guarantee.

Important note

This calculator is for education and scenario planning only. It does not provide investment advice. Dividend yields and growth rates can change, and market prices are volatile.