Income that compounds: DRIP and dividend growth
A flat yield compounded forever is a poor model for a real dividend portfolio. Two things make dividend investing powerful over time, and most basic calculators ignore both: companies raise their payouts year after year, and reinvesting those payouts buys more shares that pay their own dividends. Together they turn a modest starting yield into a large, rising income stream.
How each year is modeled
The share price and the payout per share each grow at their own annual rate. At year-end you receive a dividend on every share you hold; if reinvestment (DRIP) is on, the net-of-tax dividend buys more shares at that year’s price, and any annual contribution buys shares too. Youryield on cost is the resulting income divided by every dollar you’ve put in.
What makes this calculator different
- Reinvestment, quantified. We run the same scenario with and without DRIP and show the dollar difference — the value reinvesting actually adds.
- Growing payouts. Dividends per share rise each year, so your income climbs even with no new money added.
- Yield on cost over time. Watch a 3% starting yield grow into a far higher return on your original cost.
- Income and value, side by side. See the portfolio value and the annual dividend stream both grow, year by year.
Frequently asked questions
What is a DRIP (dividend reinvestment plan)?+
A DRIP automatically uses the dividends a stock or fund pays you to buy more shares, instead of dropping the cash in your account. Those new shares pay their own dividends next time, which buy still more shares — compounding your income and your share count year after year. Over long horizons, reinvesting is often responsible for a large share of total returns. Toggle reinvestment off in the calculator to see exactly how much it adds.
What is yield on cost, and why does it rise over time?+
Yield on cost is your current annual dividend income divided by what you originally paid — not the stock’s current price. When a company raises its payout each year (dividend growth), your income grows while your cost basis stays fixed, so your yield on cost climbs. A position bought at a modest 3% yield can, after a couple of decades of dividend growth, be paying you well into the double digits on your original cost.
What is dividend growth investing?+
Dividend growth investing focuses on companies that not only pay a dividend but reliably increase it every year. The headline yield may look unremarkable today, but a steadily growing payout compounds into a large and rising income stream — and rising dividends often signal a healthy, profitable business. This calculator models that growth explicitly through the dividend growth rate, separate from share-price appreciation.
Are dividends taxed?+
In most jurisdictions, yes — dividends are generally taxable in the year you receive them, even if you reinvest them through a DRIP, unless they are held in a tax-advantaged account. Rates depend on whether dividends are “qualified,” your income, and local rules. Enter a dividend tax rate to see how taxes reduce the cash available to reinvest; the gross income figures are still shown so you can see the full payout.
What’s the difference between total return and dividend income?+
Total return combines two things: the dividends a holding pays and the change in its share price. Income investors care most about the cash dividends — especially a growing, reliable stream they can eventually live on — while total-return investors weigh price appreciation too. This calculator shows both: the portfolio value (driven by price growth plus reinvested dividends) and the annual income the holdings throw off.
Disclaimer: This calculator is for educational purposes only. Dividends are not guaranteed and can be cut; growth rates and share-price appreciation are assumptions, not predictions; and dividend taxation varies by account and jurisdiction. It is not financial or investment advice.